A Centralised Investment Process - Joined up investment thinking

Academics have drawn up a blueprint to help financial advisers build the "holy grail" of investment portfolios.

The blueprint is the first to lay out a joined-up investment approach linking financial planning, risk profiling, asset allocation and fund selection.

The guide, produced by experts at Cass Business School, part of City University London, is designed to help financial advisers create "transparent" and "responsible" investment strategies for investors with all levels of risk appetite.

It also tackles shortcomings in the advisory process that leave some investors exposed to risk beyond their loss capacity as well as addressing regulatory concerns over a lack of transparency in allocating wealth to cash.

"There is a clear need for 'joined up' thinking that straddles the four parts of any advised solution: financial planning, risk profiling, portfolio construction and fund selection," said co-author of the report, Professor Andrew Clare.

"Achieving this in one seamless process is the holy grail of investment advisory. We develop one approach to solving this problem which is theoretically and empirically robust at every stage."

Cass Professor Steve Thomas, said: "Our blueprint focuses on simple, rule-driven portfolio construction principles which minimise the needs for heroic, and usually wrong, forecasting assumptions and opaque complexity.

"The benefit of our approach is that outcomes should be more consistent with a client's aims where they seek to minimise maximum losses."

Professors Clare and Thomas lay out their approach in a newly-published white paper titled, 'A centralised investment process: joined up investment thinking'.

At the financial planning and risk profiling stages, they define a method to help financial advisers better understand investors' tolerance for risk and their capacity for loss, versus their required return.

The authors call for the clear separation of risk tolerance - a client's attitude to risk - from capacity for loss - a client's ability to withstand a fall in their investment.

"Mixing the two concepts in one aggregate 'risk' score which is then assigned to a portfolio actually confuses a client's capacity to take risk with their actual need or desire to do so," said Professor Thomas.

Article attachments Click on the attachments icons to download or open.