Low investor awareness of risk shows need for risk targeted funds
Half of people who have an investment product are only vaguely aware of the level of risk they are taking within that product according to new research by Skandia Investment Group.
A further 8% say they have no understanding of the level of risk they are taking at all, with only two in five saying they understand the level of risk they are taking in detail.
The survey of over 2,000 people shows a clear lack of understanding by investors of how much risk they are exposing their money to, despite six out of ten people saying that when considering an investment the amount of money they might lose is a more important consideration than the amount of money they might gain.
If customers do not understand the level of risk they are taking it can ultimately lead to difficult conversations for financial advisers when having to explain to clients why their portfolios have not performed in line with their expectations. With the fear of loss being a bigger consideration than the joy of gain for most investors, it is crucial that financial advisers ensure their customers understand the level of risk they are taking with their investments.
The research shows that most people have a relatively low tolerance for risk with over two thirds of investors (69%) assessing their own level of risk as five or less out of ten, with one being lowest risk. Only 5% of investors put themselves in the highest risk levels of eight, nine or ten out of ten.
When asked to assess the maximum potential investment loss they would be prepared to accept in relation to a potential gain, people were even more risk averse with 79% falling into a risk level of five or less out of ten. This means they are prepared to accept a maximum potential loss of 14.91% for a potential gain of 27.37% according to Skandia's risk profiling methodology.
Risk profiling tools and risk targeted funds can help financial advisers and their customers agree the risk level they are comfortable with and then match an investment solution to this risk level. Importantly risk targeted funds are managed to deliver maximum returns for the agreed level of volatility and so should not produce any nasty surprises for customers.
John Ventre, portfolio manager of the Skandia Spectrum range of risk targeted funds, comments: "This research really shows the key benefit that risk targeted funds deliver to investors. Investment returns for customers are a function of both when they buy and sell and the returns delivered by their investment solution. Risk targeted funds can help advisers explain potential outcomes to their customers and, importantly, the funds are managed in line with the stated volatility range. The strength of this is that customers should be fully aware of the potential outcomes they can expect and hence advisers can manage any difficult conversations with disappointed customers, meaning they are less likely to capitulate during the worst of times."
Skandia Investment Group pioneered the concept of risk targeted funds by launching the Spectrum range in 2008. Since then Spectrum has grown to over £1bn in assets under management, making it one of the largest range of risk targeted funds. It is available through intermediaries who utilise tools provided by all the major fund platforms including Skandia Investment Solutions.
Spectrum Key points:
Spectrum consists of six risk targeted MultiManager funds
The six funds match risk profiles 3 - 8 on the Skandia risk profiling tool
Spectrum gives advisers a ready made investment solution tailored specifically to the risk profiles of their clients
These investment solutions are easy for the client to understand
Rebalancing happens automatically with the fund so there is no CGT liability until the funds are sold - unlike a portfolio of funds where the adviser has to manually rebalance (if they are authorised) creating a CGT liability