Financial advisers often use a form of segmentation to match a portfolio to their clients' investment needs. Commonly called 'bucketing', its purpose is to segment and simplify investment components. Advisers and clients are familiar with risk profiling buckets such as balanced, growth, conservative, or single asset-class buckets such as cash, shares, or property.
Despite the appeal of its simplicity, bucketing is problematic because risk profile buckets can often fail to address actual investor goals. Furthermore, if advisers use discrete buckets, it is very challenging to address the adviser's need to build and manage strategic portfolios to match each client independently. However, there is an alternative way for advisers to interpret and apply bucketing in a way that meets investor goals.
Most individual investors will have a variety of short, mid and long-term goals. For example, current living expenses, education or renovations may be short to mid-term goals, while longer-term goals may be to build or protect wealth. To meet the Client Best Interest obligations, the adviser must understand the client's present situation, help define financial goals and guide the most efficient path to achieving each goal. To do so, the adviser prepares a statement of advice that includes a portfolio allocation designed for the specified range of forward-looking needs.
The challenge when using the common bucketing approach, or indeed strategic asset allocation, is the absence of a clear link between advice and investment strategy.
Using Bucketing to manage real-returns portfolios
A genuine client-centric approach to bucketing is to build a portfolio allocation that aligns with investor goals across risk-return and income over prescribed periods.
The Dynamic Asset managed account solution provides this approach. The managed account portfolios include a range of short, mid and long-term portfolios, each with defined time-based risk-return targets. These buckets are:
- Cash Plus: A cash flow-orientated portfolio constructed to provide for capital or liquidity requirements between three and 12 months
- Short-Term: a cash flow-orientated portfolio that aims to provide for capital or liquidity requirements between 12 months and three years
- Mid-Term: a cash flow-based portfolio that aims to provide for capital or liquidity requirements between three to five years
- Long-Term Wealth Protector: A risk/return-based portfolio that aims to protect the value of capital using a mix of predominantly defensive and alternative investments
- Long-Term Wealth Builder: a return/risk-based portfolio that aims to build the value of capital using a mix of predominate growth and alternative investments
Blending buckets to match client goals
Because no single portfolio will meet all the client's needs, Dynamic Asset has designed a tool that enables advisers to blend portfolios in any combination. Their unique Portfolio Construction Tool helps advisers strategically target specific individual client goals precisely.
Using the Dynamic Asset managed account solution redefines bucketing for advisers. The combination of the goals-based investment buckets and Portfolio Construction Tool provides advisers with simplicity and client-centric investment control while ensuring the alignment of strategic advice and investing across the entire investor portfolio.
It's a spectacularly powerful way of meeting client goals accurately and efficiently.
Contact us to learn more about bucketing with the Dynamic Asset managed account solution.
