The concept of investing for outcomes has been gaining ground in the fund management industry for a while.
But many advisers and investors may still need to familiarise themselves with this relatively new concept and consider how it is going to impact them.
The advent of the Retail Distribution Review and the reforms to pensions announced by the government certainly seem to be the drivers behind this move to outcomes-based investing.
Mike Webb, chief executive of Rathbone Unit Trust Management, describes this investing-for-outcomes approach as a change in emphasis in the investment management industry – from maximising returns to understanding individual client risk.
“The big change is suitability, which is driving advice and investment advisers down a route where they understand the individual client risk profile of any given client and their capacity for loss,” he explains.
“Those are two quite essential building blocks because they change the nature of the conversation that advisers have with a client – from how to maximise returns to really understanding what goals and over what time horizons, and within what risk tolerance clients are looking to achieve what they want.”
He suggests that it is becoming increasingly important for advisers to construct a portfolio of investments that meets those risk tolerances. They then have to continue monitoring and adjusting them to remain within those risk parameters.
Nigel Whittingham, distribution director at Square Mile Investment Consulting & Research, says the regulator has placed an emphasis on outcomes and the need to focus on objectives that investors can understand.
He cites four key outcomes that investors need to keep in mind throughout their investment lifecycle, including ‘capital accumulation’, ‘preservation’, ‘income’ and ‘inflation protection’.
Mr Whittingham elaborates: “The most complicated period is in retirement because investors probably need to employ all those strategies in some shape or form. You have a combined effect of longevity and the effects of inflation, therefore you probably need to have some capital growth.
“You will definitely need to grow your income to keep pace with inflation. You probably want to have some preservation; you don’t want to take too much risk and blow everything, and you’re going to need income and income that grows over time.”
But he cautions that there is some educating to be done, and some learning on the part of investors required, before they fully comprehend the significance of these outcomes and how to achieve them.
He adds: “I think people are going to learn this through the advice process. It might be online advice; I’m not saying it has to be through a paid financial adviser.
“I think you’ll find that a lot of the online support systems or D2C businesses will be building models that help to take people through this and understand what part of that investment phase they are in.”
