He adds: “The relative pros and cons are that in terms of risk ratings everyone is getting measured in the same way by an independent methodology but the problem is it is backward looking.
“With risk-targeted funds, for an adviser the problem comes where each fund manager is determining what a risk one or risk three is. Also different managers have different ranges, we run five portfolios, others run seven or 10. It can be confusing if advisers are trying to match it into risk questionnaires.”
In addition, Mr Onuekwusi points out that the two different approaches can have different levels of client suitability.
“While risk-rated funds may tick the box in terms of initial suitability, risk-targeted ticks the box for ongoing suitability. Because the manager will continue to aim for that risk profile or target on an ongoing basis so if the client’s ATR doesn’t change then the fund will remain suitable.
“It is important if the adviser wants to have a lighter touch solution, say for smaller clients that can’t afford to keep coming to them on a regular basis if there is drift.”
