More often than not, the investment solution will be risk rated, so it is a case of matching the client's risk profile score with the investment risk rating.
A word of warning here though – the methodologies for assessing the client’s risk profile and the investment solution’s risk rating have to be compatible or you will be comparing apples with pears.
In the multi-asset arena there is a relatively new breed of solution which is called risk-targeted. It has evolved more or less hand in hand with the use of risk profiling tools.
The investment manager structures the portfolio to stay within specified risk boundaries, measured by actual or forecasted volatilities.
However, as the natural instinct of an investment manager is to take advantage of market conditions you would expect the risk taken to drift outside these boundaries from time to time dependent on whether the manager sees the market as a time for risk-on or risk-off.
To my mind, this is acceptable on occasions, but advisers do have to keep a close eye on this and the overall trend should still be within the agreed risk parameters.
It is here that the advisers earns their corn.
Risk taken by investment managers needs to be measured on a regular basis and if too much or too little risk is being taken, particularly over any significant period of time, explanations need to be sought and possibly decisions made on the continuing suitability of the proposition in question.
Often, an easier way of monitoring risk is to buy into and use the services of a third party that risk rates funds and portfolios and, crucially, updates the findings on a quarterly basis, issuing alerts where a rating has changed.
Those that prefer to do their own research need to establish risk benchmarks for different levels of risk, perhaps based on historic volatility and monitor this regularly for propositions that they have on their panel.
Discipline is required by the investment manager. There may be a temptation to run profits if, for instance, equities are doing well, but continuing to do this is likely to up the risk rating of the fund.
It is easy to get caught up in the moment, but while really good performance is certainly nice to have it is probably not required for clients to achieve their goals, particularly if risk is being taken that the investor is not comfortable with.
Close scrutiny
Perhaps warranting even more oversight by, yes, the adviser, are the majority of multi-asset propositions that are not risk targeted, but claim to be risk-focused and are usually part of a family of options ranging from low to high risk.
