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Suitability comes in many different forms, and there is a growing need for asset managers to better align fund processes with the requirements of the client.
Concerns regarding the suitability of investment products recommended to clients have grown as reviews conducted by the Financial Conduct Authority (FCA) highlighted a number of failings by firms.
“Everyone in the industry starts out with the right intentions when it comes to analysing risk and suitability,” explains Paul Fidell, Head of Business Development - Investments at Prudential. “An adviser will always aim to have a realistic and sensible conversation with a client in order to work out their attitude to risk, their capacity for loss, as well as the amount of risk they need to take in order to suggest an appropriate fund solution. Where the industry may fall down in this area is trying to turn all of this into something too simplistic like a single risk number.”
Without fully understanding the people, philosophy and process behind the funds that advisers use, Fidell argues there are questions as to how advisers can make the decisions that will fundamentally affect the financial well-being of the end consumer.
“Risk analysis today is not just about attitudes to risk or volatility but must take into account other points such as illiquidity and inflation risk too. Advisers need support around these subjects, alongside clear, transparent information that explains what a fund’s process is and the due diligence a provider offers to ensure that all risks are properly managed at every point. The asset management industry has a real responsibility here.”
In refreshing the risk-profiled multi-asset range with PruFolio earlier this year, Prudential has realigned its investment objectives to provide greater flexibility to the teams involved in the portfolio construction process. In turn, this has helped the extended range to align risk parameters much more closely with the types of solutions advisers need for the challenging market environment today, and with the FCA’s own objectives for how risk-managed funds should be described to the end client.
But how does this translate to client suitability? For some, client suitability is helping investors to understand the different types of asset mixes that can generate returns. Yet there is also a requirement to compare the amount of risk a client needs to take on to achieve their desired objectives versus the amount of risk they can or are willing to take on. These are all points that must be reviewed on a regular basis, says Fidell.
The PruFolio Risk Managed Range of 15-strong active, passive and smoothed funds was refreshed earlier this year to manage risk in each portfolio in a different way. Whilst the fund range has not increased the level of risk on offer in any of the funds, a new volatility ceiling (as opposed to equity parameters) is being used to offer flexibility within the investment mandates. The ceiling also assists advisers more by appropriately aligning the funds with their clients’ objectives.
“Advisers need solutions that are under one roof and do exactly what it says it will. But not only do they need a single solution, they need a range. After all, client risk profiles are not going to remain the same for the entire time they invest with an adviser. Changing attitudes to risk are almost as important to monitor as overall attitudes.”
“The fund range’s refresh was discussed with both advisers and clients in order to ensure we brought key objectives around suitability and risk to the forefront again. What we have now is a fund range that is actually more useful and better structured for advisers.”
Risk need versus risk taken
By providing more choice and flexibility in PruFolio, there is much more room for discussion, believes Fidell. For example, an adviser may find a risk questionnaire has positioned a client at a higher risk level. Yet they shouldn’t automatically be defaulted towards a higher risk strategy.
The amount of risk they need to take may mean there is a much more suitable fund in the range. Equally, features such as smoothing should have an impact on the decision and potentially choice of solution.
“Suitability comes in many different forms, but in the asset management world it is about the alignment of the asset manager's thoughts and processes with the requirements of the customer. The adviser's role is to first, understand both sides and second, to marry them together by selecting appropriate managers and funds for use with their clients.”
“Because our range uses the same investment strategy and aligns itself to the same processes behind the scenes, the PruFolio range is able to offer the same fund proposition but with lower risk. That is an ideal scenario for investors wanting to get some return, but at the same time help manage the risk as markets become choppier.”