"It is also important to examine how long the portfolio took to recover from the loss. The portfolio needs to work harder after a drawdown as a 20 per cent loss requires a 25 per cent return to recoup the losses."
Knowing the client
Lukas Daalder, chief investment officer for Robeco, coyly suggests it is the client who ultimately chooses the fund that is right for them, based on what they want and having taken all the advice into consideration.
He explains: "Most clients would like to see a product with the volatility of a bond and an equity-like return, but this is a bit like looking for the unicorn.
"Sure, in the past year, with equity volatility dropping to extreme low levels, it was possible to achieve, but this is not attainable over a longer period."
This means it is up to the adviser not just to assess suitability for the client at the point of purchase, but over the course of the investment horizon, as clients' lifestyles, financial situations, and markets change.
Jonathan Webster-Smith, head of the multi-asset team at Brooks Macdonald, states the suitability test should be carried out by a professional adviser qualified to provide financial advice.
"As a discretionary investment manager, our managed portfolio service is available to clients only through professional advisers", he says, but cites four useful rules to test suitability:
- Determining the client's investment objectives.
- Reviewing their financial circumstances to determine what level of investment risk (or potential investment losses) they can bear.
- Ensuring they have adequate knowledge and understanding of the risks associated with the proposed service.
- Ensuring their investment portfolio is consistent with their investment objectives and risk profile.
According to James Dowey, chief economist and chief investment officer at Neptune Investment Management, it all comes down to truly knowing your client.
"Advisers really need to know their client: their circumstances, financial objectives and personality when choosing an overall portfolio for them," he opines.
"This means much more than simply matching a basic risk profile to a volatility number. They also need to educate them so they understand that, to meet their long-term financial objectives, they might need to accept some volatility along the way."
Mr Justham also believes it is important to understand what sort of measurable is the best fit for the client. "Is relative performance or targeted return the best fit for the client's objectives?"
Cost
Then there is the matter of cost. Multi-asset funds will by their nature incur higher trading costs than a single-strategy passive tracker fund and carry a larger management fee.
Data from Defaqto shows that, with an increase in equities within multi-asset portfolios, comes a commensurate increase in the overall charges.
Yet since 2014, these have been coming down; as the following tables from Defaqto show, between 2014 and 2018, costs for both multi-asset and multi-manager funds, analysed as part of Defaqto's diamond ratings methodology, have been on a downward trend.
2014 OCF | Mixed 0-35% | Mixed 20-60% | Mixed 40-85% | Flexible | Average |
| Multi-asset | 1.11% | 1.33% | 1.35% | 1.45% | 1.34% |
| Multi-manager | 1.53% | 1.78% | 1.71% | 1.75% | 1.73% |
| 2016 OCF | |||||
| Multi-asset | 1.09% | 1.07% | 1.16% | 1.31% | 1.18% |
| Multi-manager | 1.31% | 1.43% | 1.57% | 1.54% | 1.49% |
| 2018 OCF | |||||
| Multi-asset | 1.03% | 1.06% | 1.12% | 1.19% | 1.13% |
| Multi-manager | 1.17% | 1.42% | 1.35% | 1.41% | 1.37% |
| Source: Defaqto/Morningstar | |||||
Patrick Norwood, insight analyst for Defaqto, comments: "When we carried out our 2014 Diamond Ratings, the ongoing charge (OCF) for multi-asset funds was 1.34 per cent, while the average multi-manager was 1.73 per cent.
