Devising a Truly Bespoke Investment Strategy; David Craig, Private Client Director at Private Bank Brown Shipley, Explains the Value of a Genuinely Bespoke Investment Portfolio and the Vital Importance of Aligning Asset Allocation and Client Expectations
Byline: David Craig
We are all individuals with our own unique goals and expectations from life, so for wealth to be well managed it has to be managed to meet our personal circumstances and requirements. We believe that devising a truly bespoke investment strategy requires the investment manager to build a strong relationship directly with the client. Only through a full and genuine understanding of the client can the most suitable investment decisions be made.
Trust and understanding Many people are uncomfortable talking about money. Discussing how they spend it, how much they need and what they want to happen to it when they die means making investment personal - and that means building a relationship of trust.
Academic studies suggest that as much as 90 per cent of investment returns are due to asset allocation - having your money in the right place at the right time. But our own client research suggests that what matters most to most people is being able to trust their adviser. This has to be the starting point.
The process begins with the investment manager and client exploring together the client's investment preferences and short-term and longer-term objectives. Is the person looking for income or capital growth? Is the priority protecting hard-earned wealth from erosion by inflation or are there impending capital commitments such as school fees or imminent retirement? Risk It is important to assess their appetite for risk - are they cautious or bold investors? How comfortable will they be with a portfolio built to generate high returns if it means taking them on a roller coaster ride on the way? Talking through their past investment experience can be tremendously helpful in deepening understanding of current attitudes and aspirations. In rising markets people can overestimate their appetite for risk - while when markets fall the reverse can be true. If they've had their fingers burned in the past they may be more wary going forward.
The client's aspirations over investment rewards have to be realistic - and whoever is managing their wealth must be honest. If the client has little appetite for risk but high expectations of returns then this mismatch must be pointed out; not to do so could lead to disappointment later and undermine the trust built.
Time horizon Understanding the client's time horizon is important too. The past couple of years have reminded us how volatile markets can become. For the longerterm 'growth' investor with a 10-year horizon, the ups and downs of equities in an investment portfolio in the short term may be unimportant. By contrast, someone with a shorter investment horizon will see major peaks and troughs as a serious threat.
There are people who in the autumn of 2008 were planning imminent retirement, had most of their money in equities and then watched as the FTSE 100 plummeted nearly 40 per cent in the space of eight months.
Investors with shorter-term horizons are advised to have a portfolio holding a larger proportion of much less volatile, lower-risk assets.
Portfolio building Armed with a thorough understanding of the client's objectives, commitments and risk appetite, we can start the process of building a portfolio. …