Interesting article on the FT web site about how retail investors are being pushed into unsuitable “one-size-fits-all” investments as portfolio managers change their offerings ahead of new regulations, the UK’s financial watchdog has warned.

The article is at:

http://www.ft.com/cms/s/0/bc9622c4-7e3c-11e1-b009-00144feab49a.html#axzz1rtUjoCFX

Whilst the article doesnt give the answers, it does lead to many questions about possible floors in the product based regulatory regime to date. Some things come to mind:

  • what is the ‘risk’ profile associated with the offer to the clients, is it that of the ‘risk’ profile of the ‘product’ or the overall ‘portfolio’ (in this case model portfolio). As most people know, the ‘risk’ of a diversified portfolio of risky ‘products’ is diminished when offered as a portfolio …
  • what is the basis for assessing ‘risk’ ? Is it based on the past volatility of investment valuations ?, is it based on the relative level of valuation of such assets (which more and more portfolio managers seem to be working on), is it based on the ‘risk’ that the client feel comfortable or not, or perhaps even meet their goals ?
  • is it appropriate for clients to be ‘shoved’ into what we are now calling ‘straightjacket’ model portfolios (one size fits all) ? or is a level of client specific overlay a basic fundamental part of assigning a model portfolio to a client, and the ongoing portfolio management to such ?

My belief is that we are in transitionary period in the wealth management industry where we are moving from a mentality about using modern portfolio theory to justify prescribed asset allocations according to industry practice, and often being an excuse to sell products to fit, to one where wealth advisers are going to have to be more pragmatic about how they manage their client portfolios on terms that the client understands, such as ‘we will buy this now as we think it is cheap’ etc.

The question that follows then is ‘do model portfolios achieve this ?’, or more to the point ‘does the technology and operational processes that you have in place support this type of client engagement ?’. At Financial Simplicity we have worked with some great individuals and firms to possibly have the answers.