As the pressure on the economy and markets rises, so too does the business risk that financial advisers face in relation to being able to deliver portfolio returns client's need and to any investment-linked revenue.
As part of the recent Dynamic Asset Webinar, Markets in Crisis: Portfolio Management for the New Era, Dr Jerome Lander, Portfolio Manager and CIO, and Matthew Walker, MD, discussed the growing issue of adviser risk.
The context of this risk stems from the change in the economic cycle, or "regime change", as Jerome Lander explains. Over the past 30 years, the investment environment has been defined by steadily decreasing interest rates and low inflation. It's been an environment that underpinned steadily increasing equity values and stable bond markets. It's an environment that has suited the 60/40 risk profile approach to portfolio management because asset prices kept rising.
But times are now clearly different. Inflation and interest rates are rising when public and private sector debt is unprecedented. It's an environment not suited to continuing growth in equity markets.
As Jerome Lander stated: "I think more likely than not, that we are already in the environment that other leading investors and ourselves have been discussing in recent years. It's now not something we're talking about theoretically or hypothetically".
Matthew Walker discussed this point in the context of why the Dynamic Asset business was created. "The seminal paper that influenced our approach to building Dynamic Asset was by Schroders: "Why Strategic Asset Allocation is Flawed".
"There have been several periods when SAA has not delivered over the past 100 years. They're not short periods either. They're very long periods of time – ten, fifteen, even twenty years. The 1940s and 1970s were periods like that. Another relevant and well-known example is that Japan hasn't really gone anywhere since the 1980s. More recently, coming out of the GFC took portfolios eight to ten years to draw back losses."
"And that's just drawing back losses, not actually making any money", added Jerome Lander.
So, what does this mean for adviser risk? The list is worth paying attention to.
There is a real possibility that the coming period will either see a continuing devaluation of asset values while inflation outstrips safe harbour asset classes. Or that asset values wash backwards and forwards and end up going nowhere over an extended period.
"If this occurs, and advisers stick to the traditional SAA approach, they will essentially offer their client's return-free risk. And that is not something that clients will be happy to pay a service fee for. Clients expect that their adviser will provide value for money. If they don't, they will look elsewhere".
We also need to be aware that we are in a much more clearly defined regulatory environment. In summary, clients are legally able to expect that advice is made in their best interests, that advice is suitable for their circumstances, that investment products are matched to their circumstances, and that advice is suited to the investment environment.
Therefore, today's advisers must be cautious to ensure that the portfolio management approach they use can demonstrate that they align with the client's best interest. It's reasonable to assume that a client would think that if the environment has changed, the approach should also change. So, the compliance risk is also significant.
Jerome Lander said: "If we are in fact in a new regime, a new environment, there is a huge risk to advisers unless they actually do something differently". Dynamic Asset, through its Goals or Outcomes based SMA portfolios, can help advisers and their clients through their differentiated portfolio management, built for the new era we're in.
Dynamic Asset provides a whole-of-business managed account solution for financial advisers. There are five portfolios that each have specific risk and return targets over short, mid and long-term timeframes. The unique Dynamic Asset Portfolio Construction Tool allows advisers to blend portfolios to match particular client-focused risk-return targets.
The portfolios are actively managed using the Dynamic Asset Allocation approach. It's an approach that's well-suited to periods of underperforming markets due to its focus on the likely returns of specific assets and alternative assets. The approach is forward-focused rather than relying on historical asset class performance.
Contact us today to learn more about Dynamic Asset's technology tools and how they can work for your business.