Independent financial advisers and discretionary investment managers tend to serve retail clients by relying on a very narrow definition of risk profiling. Each client is typically placed into one of between 10 and 30 pre-defined model portfolios and are charged fairly high management fees for the privilege. At ETFmatic, we firmly believe that this combination is not in the client's best interests. This is down to a number of reasons.
Firstly, the standard risk profiling tools used by intermediaries often focus on very narrow measures of risk, such as volatility, or give a broad estimate of acceptable allocations to equity versus fixed income. These broad allocations don’t differentiate between the risk profiles of different markets – such as emerging market equities versus a broad FTSE 100 index, for example. This makes for very blunt risk profiling, and where volatility as a proxy for risk is concerned, the Financial Conduct Authority argues that this is not a sufficient way to measure risk.
Secondly, model portfolios are a crude way to allocate assets for widely differing client objectives. We believe there is a need for a more personalised approach to both risk profiling and investment management.
Step One: Identifying Your Goal
A big noise is made around achieving the best returns. Yet rarely do investors analyse what “best” actually means. To us, it means managing our clients’ investments in a way that they can not only achieve their goals but also have the reassurance that whatever the market conditions, their portfolio is managed precisely in accordance with these goals.
At ETFmatic we allow our clients to define highly granular investment strategies for each goal, including asset allocation, ongoing rebalancing and trade execution. We analyse an investor’s attitude to risk and time horizon. In addition, we will look at the required speed of reaction to market movements as well as the magnitude and direction of trading in response to these developments. And we also ask the client what kind of withdrawal strategy they expect to have once they stop contributing.
This process provides the best possible outcome for each goal given the constraints and is carried out in a highly systematic manner and by keeping operational costs low.
By catering to the mass market, clients can use our services for as little as £50 per month. Also, by reducing the number of portfolio trades and focusing on smart execution, we can lower the total costs to our clients. Clients should be aware that excessive rebalancing affects customer outcomes due to taxes and other factors.