There are many things to consider in respect of fund suitability, not least the importance of aligning risk profiles and risk rated funds.
It is also important to understand how to align risk profile asset allocation models and portfolios, as well as knowing which fund features could be considered for fund suitability.
So, what is the best way for advisers to select suitable funds for their clients?
Choosing a fund
Clearly there is no straightforward answer to this question, as it’s like saying “what is the best car for a person to buy?”
In the same way that choosing a car is determined by very different individual needs and motivators, selecting the right fund, or funds, for a client will be driven by a variety of factors, from both an adviser and client perspective.
If I extend our car analogy a little further I can think about consumers that may want a car for a variety of uses, such as running the kids around, taking stuff to the rubbish dump and collecting furniture from IKEA.
Clearly the vehicle that meets those requirements is going to be very different to a two-seater convertible sports car that is suited to whizzing down country lanes on a hot summer’s day.
I can then look at funds, or investment solutions, in a similar way. Advisers, in my experience, may offer one, two or all three of the following solutions to their clients:
- One and done: Single-risk or return-focused funds. Maybe akin to the ‘does everything’ vehicle, highlighted above.
- Fund picking: Adviser-managed model portfolios. Maybe akin to more focused vehicles, such as off-road 4WD and sports cars.
- Outsourced: Discretionary fund manager (DFM) model or bespoke portfolios. Maybe akin to a chauffeur driven limo?
That’s probably enough of the analogy for now, and what I’m really suggesting is that selecting a suitable investment solution comes down to client suitability and the adviser's business model.
In this article I’m going to focus just on the first two solutions on the above list and leave DFMs out of scope for the time being.
Picking the fund
If we think about the ‘one and done’ approach then I would suggest the adviser needs to be thinking about a variety of aspects such as cost, simplicity (or complexity), potential for outperformance and, probably the most important, suitability of risk.
For example, if a client’s requirements are for low cost simplicity then a passive solution would seem a suitable option, with costs generally being lower than an active solution, with, generally, an index tracking strategy.
However, if the client is looking for the potential to outperform indices then an active approach may be more suitable, albeit with higher costs and more complex structures.
Obviously the active vs passive debate rumbles on and will never have a final resolution as different strategies perform differently in different market cycles.
This is why many advisers opt for the middle ground of recommending blended active/passive solutions.
Now, let us think about the risk aspect and I’m going to assume that, today, virtually all advisers use a risk profiling process within their business.
