For instance, suppose the client has chosen a ‘balanced’ investment with a risk rating of five (out of 10). Then imagine the manager thinks we are heading for a significant market fall.

Should the manager be applauded for putting 35 per cent in cash even if they are right?

The problem with arguments such as these is; what if the manager is wrong and there is no market fall? Or what if the move is taken far too early? 

Market performance has been missed because the manager has decided to lower the risk on the fund, say to a risk rating of three.

In these situations, the first port of call is to seek an explanation from the manager and then seek the views of the client. The adviser then needs to exercise their professional judgement and, well, advise the client.

There are a number of investment solutions that will automatically rebalance, usually quarterly, to the longer term asset allocations, which gives more certainty around the amount of risk taken and ensure that risk drift does not occur.

The argument against this is that managers cannot take advantage of short-term market movements, perhaps running a stock for a few days or weeks longer.

There is no scope for flexibility and trades could be undertaken which the manager just does not believe in.

Other elements

When looking at risk drift, the obvious elements are the risk profile of the client and the risk rating of the investment solution, but don’t forget the less obvious, which also need to be taken account of at outset and monitored regularly. These are:

• The effects of inflation – it won’t always be low.
• Interest rates – they won’t always be low.
• Client health – may not always be good.
• The client’s attitude to risk and acceptance of volatility in terms of wealth accumulation may be completely different when looking at income in retirement. Any volatility at all in retirement income may be completely unacceptable.
• Term of the investment - he longer the term, the more likely recovery is from any market shocks.

When a client’s assets are at stake, it is the adviser who must monitor and assess the various elements of risk and ensure that investment solutions selected are not only suitable but remain suitable.

Things change (drift) and when they do, it is up to the adviser to ensure the client still maintains a maximum chance of achieving their goals.

Worth paying a fee for, I would suggest.

Fraser Donaldson is insight consultant at Defaqto