Due to the current stockmarket volatility, I would like my investments to be checked to ensure I am not exposed to too much risk. What should my IFA do to ensure I am investing in the right things to match my needs
In today’s market, it is more important than ever for an IFA to develop a methodology and process to be able to recommend to clients the funds and investments that will outperform within their sectors, not just for the odd year but for the longer term.
It is also important that the additional cost that clients incur for investing in an active fund is justified or an investor may just as well have invested in a passive fund that tracks the performance of an underlying index. Aiming for outperformance is not simply a matter of trying to achieve better returns than the index and sector, it is a matter of adhering to long-term asset allocation strategies.
It is important that an investment portfolio is spread appropriately between the four asset classes of cash, bonds, equities and property. If a portfolio is not diversified enough, it will be more volatile due to being subject to the market movements of fewer or similar investment types.
The correlation of the four asset classes needs to be considered to offer some protection from stockmarket volatility. There also needs to be regular analysis of the asset allocation as there will occasionally need to be adjustments to the overall investment, resulting in the selling of some holdings and buying others.
An IFA will aim to provide the most suitable range of investments providing the required return with the lowest volatility over a reasonable period.
As you mentioned in your question, equities, bonds and even property can experience a great deal of volatility in the short term. A collective investment fund offers less volatility then investing directly in a handful of equities.
The choice of fund managers is important as they take responsibility for where the fund invests. An IFA will consider the manager’s experience and the competence of their team of researchers and analysts. They will also look at the markets in which experience has been gained and whether the manager is investing for growth, value or a combination.
Many IFAs do not consider a fund unless it is a certain size, say £50m, or has a track record of ideally over three years so past performance can be analysed thoroughly.
There a number of excellent fund managers who may from time to time move companies or set up their own fund management company. IFAs will take note when fund managers leave a fund and know where they reappear and what new money they are managing.
It is important that an IFA does this as the fund management companies have no obligation to tell investors when a fund manager leaves. An incoming manager may decide to turn the fund over and replace holdings with ones he or she believes are more suited to the fund’s investment remit. This will cause a short-term performance drag due to the costs involved.
IFAs need to be given information about the investment process of the new manager and his or her previous performance. The IFA needs to have conviction in their view that a new manager will continue to deliver returns as expected.
Reviewing a basket of investments is important as they may have been collected on a non-structured basis, for example, by buying an Isa at the end of every tax year with no regard as to whether the investments form an appropriate asset-allocation strategy. As lifestyle changes occur, it may be necessary to adjust investments to move from, say, a capital-growth to an income-generation basis or vice versa.
It is important that IFAs ensure clients maximise the tax-efficient opportunities that are available. There are fewer opportunities available to shelter investments from tax as successive Chancellors have tightened legislation.
A combination of tax-efficient investments with proper asset allocation is the ideal scenario to protect wealth from tax while ensuring growth and income are at the required level.
Kim North is the founder of Technology and Technical