What is tailored?
Some people in the industry believe that the population of investment clients can be grouped into three major risk tolerances: cautious, balanced and aggressive.
However, we need to be aware of the implications of two types of clients classed as having a balanced risk tolerance but with differently structured portfolios, assuming the same objectives, such as capital preservation. The issue that could arise is that you could end up with two different performance outcomes.
Further granularity can be achieved by subdividing these three groupings using a volatility algorithm to create a model of different risk profiles based on differing long-term asset allocations and anticipated returns. It follows that most people’s investment needs therefore can be mapped and pre-determined solutions can be manufactured.
All possible growth and/or income combinations can be provided. And with the level of technology available this is certainly possible and in fact available. This ability to provide multiple solutions removes the potential risk of shoe-horning a client into an ill-fitting investment.
From a compliance perspective, having a small number of pre-defined offerings may lead to a mismatch between client needs and available solutions. A straightforward way to overcome this is by creating a large pool of investment or risk profiles, which allows the adviser to fine-tune the suitability and that way meet client requirements. This helps advisers offer their clients consistent and cost-efficient outcomes.
The majority of investment providers manufacture using, intrinsically, the same building blocks to create client portfolios and funds: all the same notes but not necessarily in the same order, which creates different types of music from simple tunes to grand symphonies to One Direction.
In essence, a tailored approach recognises that some clients share similar aspirations, expectations and fears about their money and therefore it may make sense to group them together and have them invested into similar portfolios.
At the Defaqto DFM Conference, one very large discretionary manager said that if clients with similar risk and expected return profiles have differently constructed portfolios, specifically having different portfolio constituents, then the adviser should be worried. This is because the consequent outcomes may potentially be different.
Another large, global discretionary firm confirmed that this was a significant business and compliance risk for them, a risk which they mitigate by offering clients tailored portfolios with a bespoke relationship management service.
This is not only a benefit for the discretionary firm but also for the client because with this approach all clients benefit from a centralised pool of experts who sharetheir investment experience, research and asset class specialisation.
Each client not only accesses the house style and philosophy but a corporate framework to portfolio construction which is provided by the investment process. The result is a uniform performance outcome for each of the tailored portfolios and their investors.
