The process we use is described below.
Fact find – getting to know you
The logical starting point of the investment process is for us to get to know you. Our fact find will be wide-ranging to ensure that our subsequent advice is soundly based. As well as taking account of your personal and financial circumstances, it will cover your broader attitudes and values, and the level of experience and knowledge you have about investing and its associated risks.
Having established your goals, the results you expect and the timescales involved, we can begin to consider issues such as access to your money and the level of flexibility required in the investment selection. We will also consider your personal circumstances, including your tax position, well before we advise on investments. It is important that any investment recommendation we make is as tax-efficient as possible.
Selection of ‘tax wrappers’ – ways to hold your investments
A tax wrapper is a financial product, such as a pension, ISA or bond, within which your investments can be held and which usually has certain tax benefits.
Once we have established your financial goals we can begin to determine the most appropriate tax wrapper(s) to meet your needs. As well as pensions, ISAs and bonds, the options and combinations for consideration may include life protection and critical illness policies, depending on your circumstances.
Traditionally, investors might have held a number of tax wrappers from a variety of different companies. The downside of this is that it can create lots of paperwork, arriving at different times of year, in different formats. This can make it difficult for you, the investor, to manage and monitor your portfolio, as a whole, to ensure that your investments are performing as expected and remain in line with your risk profile.
Nowadays it’s different, and for the majority of our clients we recommend investing via an ‘investment platform’. This is a way to hold, monitor and manage all of your investments in a single place. It brings personal investing up to date. Just as supermarkets changed the face of shopping, the investment platform offers improved convenience, choice and value for money. It also provides online technology that helps us assess your attitude to investment risk and then put together a portfolio that’s most likely to behave as you’d expect.
Our investment platform partner – Skandia offers a full range of tax wrappers:
- Individual Savings Account (ISA)
- Unit trusts/Open-ended investment companies
- Personal Pension
- Onshore Investment Bond
- Offshore Investment Bond
Understanding your attitude to investment risk
Whatever your goals, we want to be sure that the investment strategy we recommend for you is in line with your attitude to investment risk. To do this we need to consider a number of factors. They include:
- The anticipated length of time you want your investment to last – its ‘term’
- Cash reserves you want to be available to meet unexpected circumstances
- Your view on the potential for your earnings to grow
- How much money you want to invest
- Whether you have any debts
- Existing savings for retirement
- Your overall view on investing
- Your goals – and whether you really need to take on risk to achieve them
- The impact of short-term falls in the value of your investments
- The importance of protecting your investment from the effects of inflation
- The question of ‘liquidity’: if you want to cash in your investments, how easy will it be to get your hands on your money?
To establish your attitude to investment risk, we will ask you a series of questions. Each answer produces a score and these are then aggregated to calculate your specific level of tolerance for risk, from 1 (low) to 10 (high). We call this your risk profile score.
The risk profiling questionnaire we use is developed by Skandia in association with the leading actuarial consultancy Towers Watson, in line with the best industry practice and the guidelines laid down by our regulatory body, the Financial Services Authority.
Many of the terms commonly used to describe attitudes to investment, such as ‘cautious’, ‘balanced’ or ‘aggressive’ can mean different things to different people. That’s why we aim to make our assessment of your attitude to risk as objective as possible. And that’s why the next stage of the process is a discussion about what your risk profile score means.
Discussing your risk profile score
Your resulting risk profile score is an indication of the extent to which you are prepared to accept a short-term fall in the value of your investments as markets go through their ups and downs. These fluctuations in the value of investments are also known as their volatility.
If your score is 1, then low volatility investments such as cash or bank deposits could be the resulting investment recommendation. If your score is 10, then we might recommend a portfolio which includes investments in asset classes such as emerging markets, whose higher expected volatility is matched by greater growth potential.
Before proceeding to make recommendations based on your score, we want to be sure that you understand what that score number means and what its implications are.
We will discuss with you how investment gains and losses might differ between different risk levels, to give you a better idea of the outcome you could expect at each level. In this way we can agree with you whether your risk rating accurately matches your true attitude to risk.
Whatever the result of that initial discussion, we will carry out the same process each year at the annual review stage to ensure that your circumstances have not changed and that your attitude to risk remains the same.
Creating an ‘asset allocation’ in line with your risk profile score
‘Asset allocation’ involves getting the balance of assets in your portfolio right. The funds available for you to invest in are categorised under different asset classes depending on their particular focus. These asset classes include cash or money market investments, UK fixed interest, international fixed interest, property, UK equity and international equity.
Different types of assets have different performance characteristics, so our aim is to allocate the right mixture of funds to your portfolio so that, over time, the peaks and troughs of their performance balance each other out in a way that is optimised for your particular risk profile and your expectations for growth.
Asset allocation is based on long-established and well-proven mathematical principles. We rely for this part of the investment process on Towers Watson, the leading firm of Actuarial Consultants. With 40% of FTSE 100 companies’ pension schemes as their clients, Towers Watson has significant experience in providing such information.
We should point out however, that even with this level of expertise behind us, we still can’t guarantee that the volatility range of a particular asset allocation will not be breached occasionally. There is always the possibility of exceptional market conditions, due to unanticipated external events.
Selecting investments to match your asset allocation
Once the asset allocation stage is completed, we need to choose appropriate investments to reflect the various asset classes in the right proportions. There are thousands of investment options to choose from, including Unit Trusts and OEICs, Investment Trusts and Exchange Traded Funds (ETFs
All these options try to achieve different things. Understanding the reasons for their relative success in doing so helps us appreciate how they may perform in the future.
One of the first and biggest decisions to make is whether to take an ‘active’ or a ‘passive’ approach to investment management. An active approach is where the fund manager uses their skill to select stocks they think will perform better than average or better than the benchmark in a particular sector. The passive approach is where funds don’t try to beat the index; they just try to match it as closely as possible. Typically the cost of active funds is significantly greater than passives.
At Barker Maule Ltd we believe that the passive approach is appropriate for many asset classes such as equities in developed economies and government stocks. Because the variability of returns in a portfolio is mostly the result of asset allocation rather than the specific choice of funds, there is little need to take the risk of active management. Not only is a passive approach the cheaper option, it is also a much purer way of representing the different asset classes. We also use active managers in our model portfolios, where we believe that they can add value. Active managers are selected using research by external fund rating agencies such as OBSR, Citywire and Standard & Poor’s.
We also offer clients with smaller amounts to invest ready made risk rated fund funds from the Old Mutual Spectrum range. Spectrum offers a range of six funds, designed precisely to meet the requirements of investors with a risk profile level of 3 through to 8.
Monitoring and reporting
The performance of the various funds in your portfolio will differ over time. If left for a long period of time, therefore, the proportions of the different asset classes they represent will change and this could result in a divergence from your original risk profile. For example if equity funds outperform fixed interest, your portfolio left unaltered would move up the risk scale and vice versa. If we feel it necessary to change a fund within your portfolio before our next meeting with you, we will contact you and ask you to authorise the switch.
At our agreed review date we will ask you to complete a further risk-profiling questionnaire so that, if your risk profile score has changed, we can realign the asset allocation of your portfolio accordingly.