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The essence of investment

Advisers need to take a range of measures to ensure investments continue to be suitable for their clients

Best Advice – Kim North

Due to the current volatility in stockmarkets, I would like my investments to be checked to ensure I am not exposed to too much

risk. What will you do as an IFA to ensure I am investing correctly 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 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 will incur for investing in an active fund (a fund in which the objective is to outperform the market average by seeking out stocks that will provide superior total return) is justified, otherwise, an investor may have been as well served investing in a cheaper 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 also 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 in order to offer some protection from stockmarket volatility. There also needs to be regular analysis of the asset allocation, as occasionally there will need to be adjustments resulting in the selling of holdings and buying others.

An IFA will aim to provide the most suitable range of investments to provide the required return with the lowest volatility over a reasonable period.

As you mentioned in your question, over the short term, equities, bonds and even property can experience a great deal of volatility.

A collective investment fund offers less volatility than investing directly in a handful of equities. The choice of fund managers is important, as it is he or she who takes the responsibly of where the fund invests.

An IFA should consider a number of issues – the fund manager’s experience, the competence of the manager’s team of researchers and analysts, in which markets has the experience been gained and if the manager is growth or value-orientated or a combination.

Many IFAs also will not consider a fund unless it is at a certain size, say £50m, or it has a track record of ideally over three years so past performance can be thoroughly analysed.

IFAs also need to take note when fund managers leave a fund and know where they reappear and what new money they are managing. This is important as the fund management companies have no obligation to tell investors when a fund manager leaves.

An incoming manager may decide to change the fund 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 then need to look at the investment process and previous performance of the new manager.

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 make sure clients are maximising the tax-efficient opportunities that are available. A combination of tax-efficient investments with proper asset allocation is the ideal scenario to protect wealth from tax while ensuring the growth and income are at the required level.

Kim North (kim@techandtech) is director of Technology and Technical


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