APRIL 2025
Adapting to a changing market
In this Watchlist...
Advisory firms are under pressure to navigate shifting regulation, rising costs and evolving client expectations. As the industry adjusts, the role of MPS is expanding — offering firms new ways to improve efficiency, manage risk and deliver better outcomes for clients.
ith MPS assets under management continuing to grow, firms are reassessing their strategies. This MPS Watchlist looks at how MPS can be integrated into advice
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In this edition of the MPS Watchlist, Brewin Dolphin, Quilter, Quilter Cheviot, Tatton and Timeline share their views on the forces shaping the market and the strategies helping firms stay competitive.
• The growing use of alternative investments to mitigate volatility • Blended portfolios as a response to client demand for balance • Efficiency as a competitive advantage for advisory firms • Intergenerational wealth transfer and long-term planning • How to build resilience amid global economic uncertainty
The perfect blend? Finding strategic balance with blended managed portfolios
Q&A WITH...
INSIGHT
David Hood, Head of Central Investment Solutions
Stuart Clark, Portfolio Manager, WealthSelect
Is there a doctor in the house?
The great wealth transfer – the opportunity is now!
The drawdown challenge
Oswald Oduntan, MPS Investment Manager
MPS: Don’t rue the rebalance
MPS WATCHLIST
Why passive funds deserve a place in every portfolio: From the average joe to the ultra-wealthy
Risk mapping vs risk targeting: Weighing precision against flexibility
The business of investment management is increasingly complicated because Consumer Duty means advisers who continue to manage client portfolios themselves face rules akin to asset managers. As a result, a growing number of advisors prefer to rely on MPS to manage assets and focus their efforts on financial planning and maintaining client relationships.
• Investors may not need to choose between active and passive strategies • Home bias should be a thing of the past • Advisers should be rethinking how to manage investments for clients • That there has never been a better time than now to be an adviser • Read the latest on issues in the sector
odel portfolio services are projected to grow to £154bn by 2028 and their increasing popularity reflects their importance for financial advisors and their practices.
Jack Collini, Portfolio Manager
businesses, where the challenges lie, and how to select the right solutions for long-term success.
Key themes in focus:
The value of investments, and any income from them, can fall and you may get back less than you invested. Information is provided only as an example and is not a recommendation to pursue a particular strategy. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. You should always check the tax implications with an accountant or tax specialist. Neither simulated nor actual past performance are reliable indicators of future performance. Investment values may increase or decrease as a result of currency fluctuations. RBC Brewin Dolphin is the sponsor, investment manager and distributor to certain funds. RBCBD applies robust conflict management practices and disclosures to ensure these funds and relevant services are appropriate to meet client needs. RBC Brewin Dolphin and its employees do not receive additional remuneration or non-
monetary benefits when a client invests in these funds or investment solutions. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk. RBC Brewin Dolphin is a trading name of RBC Europe Limited. RBC Europe Limited is registered in England and Wales No. 995939. Registered Address: 100 Bishopsgate, London EC2N 4AA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. ® / ™ Trademark(s) of Royal Bank of Canada. Used under licence.
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RBC Brewin Dolphin offers four different MPS services which are available on 20+ key platforms: Managed Portfolio Service, Passive Plus MPS, Blended MPS and Sustainable MPS. For more information visit our website and contact our local business development managers at www.brewin.co.uk/our-people.
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Jack Collini, Portfolio Manager, RBC Brewin Dolphin
“While a blended portfolio may, on the surface, seem like a natural progression from active, passive and passive plus options, it simply isn’t a case of crudely bolting bits of those two strategies together”
“Just because passive investments are doing well this year doesn’t mean that they will do the same next year”
Berron Parker, Portfolio Analyst, RBC Brewin Dolphin
It’s not surprising then, that many investors are asking their advisers why they should be paying active managers’ fees when passive investments are, in many cases, outperforming their active counterparts. And it’s a not-unreasonable question.
The simple answer is that leadership in markets will always continue to shift. Just because passive investments are doing well this year doesn’t mean that they will do the same next year. If certain indices take a tumble, then so will any related passive investments.
Choosing an active or a passive investment approach is an important decision that investors and advisers must make. And it’s safe to say that neither is inherently right or wrong.
Indeed, as our colleague David Hood wrote in the MPS Watchlist in 2024, this is no longer a binary decision. The market has already moved on from pure active vs passive investing, with the introduction of actively managed passive portfolios – such as the RBC Brewin Dolphin Passive Plus MPS, which gives access to a range of lower-cost index funds, carefully selected to meet an investor’s specific attitude to risk.
In a market where there are thousands of different benchmarks covering different asset classes, geographical regions, business sectors and investment styles, such an approach has underpinned many thousands of portfolios and provided transparency for advisers and investors.
he debate regarding active vs passive investment continues to rumble on, with convincing arguments made by advocates of both approaches. Over the past year or so, passive investments have done very well, owing to the strong performance of many indices and the narrow leadership of the ‘Magnificent Seven’ U.S. tech stocks in particular. In the year to 18 February, for example, the S&P 500 rose by 23.2% and the FTSE 100 by 13.39%.
Managed portfolios – be they active or passive – are already bridging the gap, with expert research teams selecting the most appropriate funds and trackers and creating risk-based portfolios that advisers can match their clients with. Our Passive Plus portfolios, for example, cover a risk-return spectrum of Cautious, Cautious Higher Equity, Income, Income Higher Equity, Balanced, Growth and Global Equity.
But here we need to look even further beyond the binary.
As much as investors may prefer to choose between an active or passive approach, there are those who want a more balanced investment strategy that has elements of both. This doesn’t necessarily mean a 50/50 split, it could be primarily active with some passive elements or vice versa.
This is a demand that is being met by our new Blended Managed Portfolio Service (Blended MPS).
In reality, combining passive and active elements in a portfolio isn’t new. For example, most of our Passive Plus portfolios utilise the actively managed MI Select Managers (MISM) Alternatives Fund to invest in a diversified, global basket of alternative assets including commodities, real estate, private equity and tactical credit. This can help hedge against sudden index downturns and support portfolio diversification. This is an important element as we believe that alternative assets, by their nature, are not well suited to passive investment as some of the investment approaches can be complex.
Not only that, but the MISM fund follows a manager-of-managers structure, so it allows for low transaction costs and lower fees compared to the active element of a fund-of-funds approach.
While a blended portfolio may, on the surface, seem like a natural progression from active, passive and passive plus portfolios, it isn’t simply a case of crudely bolting those two strategies together.
In our case, we have an overarching tactical asset allocation, which is a top-down input. It feeds directly into our Active MPS, our Passive Plus MPS and, as a result, our Blended MPS. So, if we're concerned about equity market valuations, for example, at a very top level, we would reduce equity exposure across all of our MPS ranges.
What our Blended MPS solution does underneath the hood, is to utilise our expertise in managing the active and passive portfolios, bringing together the benefits of both approaches.
When we're constructing the blended portfolios, we look to use more passive exposure for opportunities in markets that are typically more efficient and vice versa. Within equities, we currently have active exposures in Asia and emerging markets, because these are typically less efficient than the U.S. or global equity markets, and if we were to take a passive approach there, it would generally lead to undesirable style and sector allocations.
We will, however, always make that active and passive decision in the context of the broader portfolio construction, which ultimately comes down to the size and conviction that we have behind each opportunity, along with the cost impact from delivering the passive approach.
Ultimately, a Blended MPS gives advisers and their clients an additional choice of diversified portfolios that come with built-in cost efficiencies. They act as a complement to active and passive versions that can work in different market environments.
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From our conversations with advisers and intermediaries, this level of market saturation can prove daunting. On one hand, there are thousands of active funds and passive investments to choose from. Yet, on the other, each investor has a specific attitude to risk and investment objectives that need to be met.
Moving beyond active vs passive
Finding the right mix
1. Morningstar (as at 18/02/25)
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With many financial advisers looking to provide their clients with a balance between active and passive investment strategies, blended portfolios are proving an attractive option, as RBC Brewin Dolphin’s Jack Collini, Portfolio Manager, and Berron Parker, Portfolio Analyst, explain.
The value of investments, and any income from them, can fall and you may get back less than you invested. Information is provided only as an example and is not a recommendation to pursue a particular strategy. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. You should always check the tax implications with an accountant or tax specialist. Neither simulated nor actual past performance are reliable indicators of future performance. Investment values may increase or decrease as a result of currency fluctuations. RBC Brewin Dolphin is the sponsor, investment manager and distributor to certain funds. RBCBD applies robust conflict management practices and disclosures to ensure these funds and relevant services are appropriate to meet client needs. RBC Brewin Dolphin and its employees do not receive additional remuneration or non-monetary benefits when a client invests in these funds or investment solutions. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk. RBC Brewin Dolphin is a trading name of RBC Europe Limited. RBC Europe Limited is registered in England and Wales No. 995939. Registered Address: 100 Bishopsgate, London EC2N 4AA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. ® / ™ Trademark(s) of Royal Bank of Canada. Used under licence.
so, passive investments have done very well, owing to the strong performance of many indices and the narrow leadership of the ‘Magnificent Seven’ U.S. tech stocks in particular. In the year to 18 February, for example, the S&P 500 rose by 23.2% and the FTSE 100 by 13.39%.
he debate regarding active vs passive investment continues to rumble on, with convincing arguments made by advocates of both approaches. Over the past year or
Read our Insight >
This is for FCA authorised individuals only and should not be distributed in whole or part to retail clients. The value of investments, and any income from them, can fall and you may get back less than you invested. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Neither simulated nor actual past performance are reliable indicators of future performance. Investment values may increase or decrease as a result of currency fluctuations. RBC Brewin Dolphin is the sponsor, investment manager and distributor to certain funds. RBCBD applies robust conflict management practices and disclosures to ensure these funds and relevant services are appropriate to meet client needs. RBC Brewin Dolphin and its employees do not receive additional remuneration or non-monetary benefits when a client invests in these funds or investment solutions. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk. Opinions expressed in this publication are not necessarily the views held throughout RBC Brewin Dolphin. RBC Brewin Dolphin is a trading name of RBC Europe Limited. RBC Europe Limited is registered in England and Wales No. 995939. Registered Address: 100 Bishopsgate, London EC2N 4AA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. ® / ™ Trademark(s) of Royal Bank of Canada. Used under licence.
“A key differentiator is that we can access asset classes that are typically difficult to include in MPS structures, such as investment trusts and catastrophe bonds”
David Hood, Head of Central Investment Solutions at RBC Brewin Dolphin
“The MI Select Managers Alternatives Fund is structured around three core exposures: absolute return strategies, property and infrastructure, and commodities”
Jack Collini, Portfolio Manager at RBC Brewin Dolphin
David: Our Active MPS proposition has been around since 2008, making it one of the longest-standing MPS propositions available. We introduced Passive Plus in 2016, so that now has a 9-year track record. Our Sustainable MPS launched in 2021, and in 2020, we introduced our Voyager funds, which are a unitised version of our Active MPS proposition.
As investor preferences shift and markets evolve, Managed Portfolio Services (MPS) have had to adapt. The integration of alternative investments, a more flexible approach to asset allocation, and a focus on diversification have all played a role in shaping today’s MPS landscape.
David: There has been a huge amount of change over the years which has really been led by advisers. Over time, we’ve expanded significantly and are now available on around 25 third-party platforms. We also cater for seven different risk profilers used by advisers.
Jack: A major development was the introduction of MI Select Manager (MISM) funds in 2018, which serve as core building blocks within our MPS. These funds allow us to leverage economies of scale, ensuring that the benefits accrue directly to clients.
The MISM funds are designed to provide core active and passive exposures within our MPS. Structurally, they’re different from traditional fund-of-funds in that we allocate capital to third-party managers within segregated accounts, which gives us greater oversight and flexibility in how we allocate to them.
Q
What MPS offerings do you have, and when were they introduced?
David: This approach also ensures cost efficiency, consistency across platforms, and better oversight of manager performance. It also allows us to make adjustments dynamically in response to market changes.
Jack: The MI Select Managers Alternatives Fund launched in February 2022, and the timing was quite fortuitous given the market conditions. The fund is structured around three core exposures: absolute return strategies, property and infrastructure, and commodities.
Jack: Alternatives play a crucial role, particularly in lower-risk portfolios, by offering diversified return streams. Different asset classes within alternatives behave differently in various market conditions, helping to reduce overall portfolio volatility. It's really about being able to deliver those diversified return streams, particularly at the lower end of the risk spectrum where they represent quite a significant allocation.
David: One of the biggest advantages of the MISM funds is their flexibility. If a manager leaves a fund, we can reallocate capital to a different manager within the same structure quickly and efficiently, avoiding a full rebalance across client portfolios.
David: We remain overweight in US equities due to the potential impact of tariff policies and broader economic trends. While tariffs may not be positive in aggregate, we might expect the US to be in a stronger position than other regions given that it’s a net importer.
Jack: We also hold an overweight position in gold, reflecting ongoing central bank buying and geopolitical uncertainty.
David: In addition, we are overweight sovereign bonds, which provide downside protection in case of a market sell-off. At the same time, we’re underweight corporate bonds, as we believe investors are not being adequately compensated for the risk they’re taking given current tight credit spreads.
Jack: Ultimately, our approach allows us to remain nimble, adjust allocations as needed, and ensure that our clients' portfolios are well-positioned for changing market conditions.
Jack: This structure also gives us greater visibility into the behaviour of fund managers. If we notice style drift—where a value manager starts investing in growth stocks, for example—we can act immediately. This ability to actively manage exposures has been a significant benefit to end clients.
There are asset classes with distinctive characteristics at work in this fund, so at times it will look quite different. For example, at the moment, we are overweight physical gold as an asset allocation call. That means that physical gold is representing just over a third of the fund. But at times, if we were to go underweight physical gold and have a slightly more negative view, you would see the makeup of this fund move quite significantly.
David: A key differentiator is that we can access asset classes that are typically difficult to include in MPS structures, such as investment trusts and catastrophe bonds. The SCOR Cat Bond fund, for example, provides exposure to insured risks related to natural disasters.
Jack: Another advantage is that this fund allows us to hold physical gold, something that’s often difficult within an MPS. We also have exposure to defensive strategies such as the Lumyna Bank of America Commodity Alpha fund and the One River Risk Responders fund, which have historically provided effective downside protection during market volatility.
How have your MPS offerings adapted over the years?
What is the MISM Alternatives fund, and how does it differentiate itself from competitors?
What role do alternative investments play in a diversified portfolio, and why are they important?
Can you share some success stories or case studies that highlight the impact of MISM funds?
How do MISM funds align with current market trends and investor needs?
Q&A
with...
David Hood & Jack Collini
The future of MPS: Adaptability and growth in a changing market
David Hood, Head of Central Investment Solutions, and Jack Collini, Portfolio Manager at RBC Brewin Dolphin, discuss the evolution of their MPS offerings, the role of alternative investments, and how their MI Select Managers funds align with investor needs in today’s market.
Read our Insights >
If you’d like to know more about a managed portfolio service that ticks all these boxes, you can find out more about WealthSelect here.
Important information Past performance is not a guide to future performance and may not be repeated. Investment involves risk. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rates may cause the value of overseas investments to rise or fall. www.quilter.com Please be aware that calls and electronic communications may be recorded for monitoring, regulatory and training purposes and records are available for at least five years. The WealthSelect Managed Portfolio Service is provided by Quilter Investment Platform Limited and Quilter Life & Pensions Limited. “Quilter” is the trading name of Quilter Investment Platform Limited (which also provides an Individual Savings Account (ISA), Junior ISA (JISA) and Collective Investment Account (CIA)) and Quilter Life & Pensions Limited (which also provides a Collective Retirement Account (CRA) and Collective Investment Bonds (CIB)). Quilter Investment Platform Limited and Quilter Life & Pensions Limited are registered in England and Wales under numbers 1680071 and 4163431 respectively. Registered office at Senator House, 85 Queen Victoria Street, London, United Kingdom, EC4V 4AB. Quilter Investment Platform Limited is authorised and regulated by the Financial Conduct Authority. Quilter Life & Pensions Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Their Financial Services register numbers are 165359 and 207977 respectively. VAT number 386 1301 59. Quilter uses all reasonable skill and care in compiling the information in this communication and in ensuring its accuracy, but no assurances or warranties are given. You should not rely on the information in this communication in making investment decisions. Nothing in this communication constitutes advice or personal recommendation. Data from third parties (“Third-Party Data”) may be included in this communication and those third parties do not accept any liability for errors and omissions. Therefore, you should make sure you understand certain important information, which can be found at www.quilter.com/third-party-data/. Where this communication contains Third-Party Data, Quilter Investors cannot guarantee the accuracy, reliability or completeness of such Third-Party Data and accepts no responsibility or liability whatsoever in respect of such Third-Party Data.
Andy Miller, Lead Investment Director
“We have seen a substantial industry trend of advisers who no longer see their value as being investment managers. They have instead embraced the value of being holistic financial planners”
“While technology can provide many efficiencies, 'peace of mind' often depends on human empathy and experience, making it less replaceable”
n February 2014, the Retail Distribution Review was just over a year old, most financial advisers managed their own client portfolios, and on-platform managed portfolio services were in their infancy. In fact, on the Quilter platform, not a single penny went into a managed portfolio service.
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The expansion of WealthSelect in March 2022 was designed to serve advisers reviewing their investment proposition in light of the regulatory challenges of the Consumer Duty, which requires advisers to demonstrate they have matched products and services to the specific needs of their clients. The greater the range of options available to an adviser, the greater their ability to meet the specific needs and preferences of their clients.
Since then, we have seen a substantial industry trend of advisers who no longer see their value as being investment managers. They have instead embraced the value of being holistic financial planners.
A recent NextWealth study showed that 59% of those offering client-facing advice at high-growth firms now refer to themselves as financial planners. They are more likely to work for a chartered firm, with a higher level of qualification, and be younger than their adviser counterparts . They see their role as that of a ‘financial doctor’. They are there to assess the financial health of their clients and prescribe the right medicine to help them achieve their objectives.
This trend towards more holistic financial planning, beyond investment management, has led advisers to move away from running their own portfolios in favour of outsourcing. After all, doctors do not usually manufacture the drugs themselves.
This shift has been partly down to the operational challenges of managing such portfolios on an advisory basis. The more clients an experienced adviser has, the greater this challenge becomes - so it is quite easy for an adviser to become a victim of his or her own success.
However, this change has also been driven by an increased awareness of what clients really value. In the US, studies have estimated that individuals can spend up to 9 hours per work week worrying about their personal finances , which can impact their overall well-being. Alleviating this worry can’t be achieved by investment management alone. Whereas holistic financial planning with its thorough analysis of the goals and objectives of clients and then building and delivering the right plans to achieve them, can provide the answers investors are looking for.
Advisers embracing their true value
Another factor in the growth of the financial doctor has been the huge evolution of the solutions available. WealthSelect is a prime example of this. In 2014, the original 16 portfolios were launched. Then, in March 2022, a further 40 portfolios were launched. These new portfolios offer advisers and their clients access to passive, responsible, and sustainable investment options, all of which have an impressive track record since inception.
Evolving the managed portfolio service
So, what does the future look like for advisers providing investment advice? There are two main areas that will change dramatically over the next few years when it comes to the managed portfolio service market.
The first is transparency. Until recently, it has been very difficult to compare different portfolios on a like-for-like basis. This has been partly down to a lack of consistent data, but in some cases, the providers themselves have been reluctant to share costs or performance numbers in a clear and open manner. This is unacceptable. We believe that any provider of a managed portfolio service should be transparent and open with their data. We are hopeful that transparency will improve as the market grows, allowing advisers to make a more informed choice.
The second is the rapid pace of technological development. The use of technology will allow the providers who embrace it to improve portfolio construction, research, risk management, and customer servicing. This will deliver even more benefits to the advisers and their clients who choose to outsource to a manage portfolio service. However, while technology can provide many efficiencies, 'peace of mind' often depends on human empathy and experience, making it less replaceable. Investors are much more likely to follow advice from a human than from AI. A recent study by Boring Money, showed that the number of investors who would accept AI investment recommendations declined by 7% between 2022 and 2024 .
Change is coming
So, the future is bright for advisers who partner with the right managed portfolio service provider, but what does that managed portfolio service provider look like?
They should have the right range of investment options, a solid investment process, reasonable costs, and ultimately deliver the right outcomes for investors. In an increasingly competitive market, the provider should be open and clear about all these elements to allow advisers to make the right choice for their clients.
The future is bright
1. Source: NextWealth, January 2025
2. Source: The Future of Financial Advice White Paper, World Economic Forum, July 2024
3. Source: Boring Money
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As WealthSelect celebrates its eleventh anniversary, Andy Miller, Lead Investment Director at Quilter, looks at how much financial advice has changed since 2014, and what could change in the future.
n February 2014, the Retail Distribution Review was just over a year old, most financial advisers managed their own client portfolios, and on-platform managed portfolio services
were in their infancy. In fact, on the Quilter platform, not a single penny went into a managed portfolio service.
1. Source: NextWealth, January 2025 2. The Future of Financial Advice White Paper, World Economic Forum, July 2024
Stuart Clark, WealthSelect Portfolio Manager
“We constantly look to evolve the approach to managing the portfolios, refining it to remain relevant in the current market environments”
“Asset management is a ferociously competitive environment and one which is not afraid to take the wind out of your sails if you become over-confident in your abilities”
WealthSelect is an innovative, actively managed discretionary investment solution that allows advisers to choose a portfolio that best meets the investment needs and appetite for risk of their clients.
Quilter's WealthSelect Managed Portfolio Service has gone from strength to strength since its launch in 2014. Stuart Clark, portfolio manager of WealthSelect, looks back at eleven eventful years and considers what the future may bring for discretionary portfolio management.
Since its launch in 2014 it has evolved to include passively managed portfolios, as well as a range of responsible and sustainable investment options. The portfolios are managed by me, Helen Bradshaw, and Bethan Dixon. We are supported by a range of dedicated teams across manager research, operational due diligence, responsible investment, risk, and implementation.
What is WealthSelect all about?
In 2014, we launched WealthSelect to meet the evolving needs of advisers and their clients at that time. However, the world now bears little similarity to that of eleven years ago, so it has been vital for us to adapt and move with the times.
We started with a range of 16 actively managed and blended portfolios. This was expanded in 2022 to include another eight passively managed portfolios as well as a range of Responsible and Sustainable Portfolios.
Apart from the broadening of the range, one of the most significant changes has been the extension of the portfolio management team with Helen Bradshaw and Bethan Dixon joining in recent years. This has significantly increased our coverage and idea generation for the portfolios and should enable us to build further on the track record.
We have also evolved our approach to managing the portfolios, refining it to remain relevant in the current market environment. This has involved revisions to the strategic asset allocation model, the integration of new information and data into our portfolio analysis, and, of course, learning from our mistakes.
During the last 11 years we have seen an incredible amount of change in the modern world. Political parties have been upended, wars have been started, and we cannot forget the impact of the coronavirus pandemic. All of this has impacted how we consider risks and opportunities within the portfolios.
So, how has WealthSelect changed since its launch in 2014?
The ‘original’ portfolios we launched in 2014 have performed incredibly well and have consistently outperformed their IA sector performance comparators. The theme of outperformance has also been replicated with the Managed Passive and Responsible Portfolios launched in 2022, with all ahead of their performance comparators.
Sustainable investing has faced significant challenges in the last few years with geopolitical headwinds leading to changes in political prioritisation. This has weighed on the performance of the Sustainable Portfolios. However, when measured against a peer group of similar portfolios they have performed comparatively well.
How has WealthSelect performed for investors over the past 11 years?
I am extremely grateful for, and humbled by, the trust that has been placed in us. While there are many more important jobs being undertaken every day, we want you and your clients to know that we remained 100% focused on managing the portfolios to the best of our abilities to repay that trust and help your clients achieve their financial objectives.
Asset management is a ferociously competitive environment and one which is not afraid to take the wind out of your sails if you become over-confident in your abilities. Successfully managing WealthSelect through some seismic shifts in the macro-economic landscape in recent years has been an incredible challenge. However, it is one we have done while remaining firmly aware that we are only as good as our last set of decisions. To be taking on these challenges with colleagues that have such high capability and energy as Helen and Bethan means we can continue to treat future challenges as opportunities to deliver for you and your clients.
What has been your highlight since launching WealthSelect?
Each portfolio has a defined volatility target. We manage each portfolio to always stay within this target. We are very aware of the efforts that financial advisers undertake to get to know their clients and understand their appetite for risk, so we need to ensure that we deliver investment portfolios in line with this. At the same time, we aim to maximise the return while also adhering to the dual objectives of the Responsible and Sustainable Portfolios.
The starting point for each portfolio is the strategic asset allocation. We then populate this with sub-advised mandates managed by our WealthSelect global partners or funds from the wider investment universe.
We rebalance the portfolios on a quarterly basis, but we also undertake ad hoc tactical rebalances at our discretion to take advantage of market opportunities.
How are the portfolios managed?
Click here to find out more about the WealthSelect Managed Portfolio Service.
Stuart Clark
Adapting to change: The evolution of discretionary portfolios
Some investment solutions stand the test of time, but continuous adaptation is usually required. So how can an evolving approach to portfolio management drive long-term success?
Oswald Oduntan, Investment Manager
“Our Building Blocks structure allows us to prioritise agility and precision in adjusting our market exposure, while remaining a model-based portfolio service”
“Waiting for a periodic ‘catch-all’ rebalance to implement portfolio change, and then doing so solely through external fund holdings, is becoming an outdated concept”
n recent years there have been a number of substantial changes in the market environment, with each development serving as a timely reminder to stay both humble and pragmatic. Differing driving forces and the associated investment opportunities mean that specific market positioning is as important as ever.
While the adage of remaining invested is crucial, how you invest is arguably the more important question to ask right now. For MPS managers this means that being nimble and having the ability to rotate positions quickly is crucial for success.
Rebalancing is an often overlooked area of portfolio management, but different rebalancing approaches among different MPS providers can substantially impact relative market returns.
Rebalancing in a traditional MPS generally means buying and selling assets to achieve a desired risk level. At times investment managers will also have to rebalance portfolios to reflect a change in their investment views.
While many investors are keenly aware of positioning when they first invest, less are interested in how this positioning develops over time.
Timeliness Time out of the market Strategy conflicts.
• • •
At Quilter Cheviot, we believe our ‘Building Blocks’ approach provides clear advantages related to rebalancing compared to the approach of a traditional MPS.
Why does it matter?
There are three factors to consider when assessing the effectiveness of a rebalance:
Timeliness: Many MPS providers schedule rebalances on a quarterly basis for operational efficiency, particularly if they run multiple “bespoke MPS” mandates. In recent years we have experienced fast-moving markets, and this prescriptive, periodic approach can have a detrimental effect on performance when the provider is unable to be as agile as markets demand.
Time out of the market: From previous experience, we know that implementing a rebalance across multiple platforms can be a laborious process, taking days, if not weeks, to plan and execute. Platforms typically operate on a “sales-then-buys” basis. Although this is not unusual among MPS providers, it invariably leads to time out of the market. When executing sell decisions, different valuation points, trading profiles and cut off times for different funds means that it can be several days before a sale price is confirmed. Only after this confirmation can purchases be made, which can be 3-5 business days after the initial instruction. Further complexity is added to this process if a fund gates (where withdrawals from a fund are temporarily blocked). While this may appear a minor concern, it can have a detrimental impact on returns. For example, if 10% of a portfolio is rebalanced each quarter then 10% could be effectively not invested for three days (or more). Over a year this equates to 12 days when a tenth of the portfolio is out the market –roughly 5% of trading days.
Strategy conflicts: On top of time out of the market, MPS providers may avoid certain funds due to their clunky trading profile. Funds that require longer notice periods, have irregular valuation points or delayed pricing confirmation are more likely to be avoided in an attempt to minimise disruption. This can significantly reduce the investable universe and lead to managers not selecting funds that they otherwise would have thought attractive investment opportunities. Trade prioritisation is another issue with this approach as some MPS offerings may receive preferential treatment in executing trades, at the expense of others managed by the same provider. A firm may be rebalancing multiple bespoke or tailored MPS’, as well as their standard MPS – these must be put in order of priority by the MPS provider when scheduling that rebalance. Where do your clients sit in this order?
Rebalance considerations
At Quilter Cheviot we firmly believe that service growth – new platforms, new strategies or bespoke portfolios – should not come at the expense of investment dynamism.
Thanks to our innovative structure, where portfolios are constructed using eight funds (Building Blocks - each of which is designed to provide specific geographic or asset class exposure), we are able to adjust our holdings at the fund level when required; typically on the same day as the decision is made to adjust the investments. This change is immediately reflected at the fund level across all shareholders and distribution channels, at the same time ensuring that clients receive a consistent outcome regardless of the channel through which they invest. Full rebalances take place on an ad hoc basis to reflect our latest asset allocation views. This approach means that we do not need to compromise investment timing and positioning to account for operational bandwidth.
Our Building Blocks structure allows us to prioritise agility and precision in adjusting our market exposure, while remaining a model-based portfolio service. We dynamically reflect our “house view” in a responsive manner, capitalising on the research insights provided by our in-house equity, fund and fixed interest specialists.
Recent events such as the US election and UK budget have added to the level of uncertainty in the rate environment. In addition, economies on either side of the Atlantic are displaying contrasting performance with American exceptionalism continuing and Europe experiencing a slowdown. This increases the prospect of monetary policy divergence and opens up tactical opportunities. Having an MPS that can react more swiftly in the selection of underlying equity and bond holdings – and execute these ideas in a timely manner – brings clear advantages.
In this tech-driven world thirsty for news and data, waiting for a periodic ‘catch-all’ rebalance to implement portfolio change, and then doing so solely through external fund holdings, is becoming an outdated concept and one that has the potential to impact investor returns. Having greater control of the underlying holdings within an MPS while retaining the ability to effect changes immediately is a relatively novel idea, but one the sector should fully embrace up to as it continues to grow.
Our approach
Quilter Cheviot offers seven actively managed, multi-asset strategies using their pioneering "Building Blocks" approach. For more information visit quiltercheviot.com/mps
Agility and timely rebalancing are crucial for MPS managers. Oswald Oduntan, Investment Manager on Quilter Cheviot’s MPS team, explains how a flexible approach helps us respond quickly to market changes and improve performance.
n recent years there have been a number of substantial changes in the market environment, with each development serving as a timely reminder to stay both
humble and pragmatic. Differing driving forces and the associated investment opportunities mean that specific market positioning is as important as ever.
About the Building Blocks approach taken by Quilter Cheviot, click here.
For your copy of our latest quarterly report, click here.
To view our latest performance compared to peers’, click here.
“With expectations so high on the Magnificent Seven stocks, there is plenty of room to disappoint”
“Passive funds are only considered as a temporary home for flows or a targeted exposure to a specific index, rather than relied upon to lower costs”
First off, I think it’s important to define the current MPS landscape. Traditional MPS offerings are often structured in a way that limits flexibility to achieve financial objectives. Three features of a “typical” MPS are:
I believe these factors limit a manager’s ability to implement swift, decisive change. At Quilter Cheviot we believe our offering is the most active proposition in the MPS space, offering several potential advantages in terms of flexibility, returns and risk management.
Blend of externally managed funds Comprising both active and passive holdings Rebalanced on a periodic basis
1 2 3
Responsiveness: Investment timing can be critical. The more time out of the market, the more difficult it is to take advantage of opportunities. Same day adjustments to investment holdings ensure investment timing and positioning are not compromised due to operational bandwidth. Consistency without restriction: MPS providers may be forced to make fund substitutions if boutique fund managers or certain share classes are not available on certain platforms, so you and your client may gain a different market exposure than expected. Active management level: A truly active structure can improve flexibility, returns, and risk management, but can be overlooked for a more passive or hybrid approach to bring down costs.
Could you outline your approach to investing and explain the key attractions of your MPS?
The structure allows us to reflect our highest conviction investment views and go beyond open-ended funds. We can invest in direct equities, direct bond holdings, exchange-traded commodities, and closed-ended exchange traded funds, irrespective of the wrapper in which a client’s portfolio is held. Passive funds are only considered as a temporary home for flows or a targeted exposure to a specific index, rather than relied upon to lower costs — it is not unusual for ‘traditional’ MPS managers to have as much as 50% invested in passive investments in a bid to reduce client costs. This avoids the pitfall of diluting active exposures and alpha-generating potential.
This allows for a more active and dynamic investment process. Partial unitisation while maintaining an MPS structure means that the majority of trading is done within our “Building Blocks” and we estimate around 75% of our trading activity is “under the bonnet”. This has allowed us to substantially reduce turnover at the portfolio level, with average annual turnover falling from 26% during 2018-2020 to 6% in 2023 and 5% in 2024.
Besides operating and executional advantages, how else does the “Building Blocks” structure impact your active approach?
We maintain that it is best to not let the tax tail wag the investment dog, and as such our MPS is CGT agnostic. Given our structure, our investments are fully consistent across all platforms, trading daily. Our structure represents something of a halfway house for CGT, sitting somewhere in between a traditional MPS and a multi-asset fund, whereby no returns are realised and there is a full roll-up in profits.
Capital Gains Tax (CGT) has become a bigger topic given the raising of rates and reduction in allowances. How does your MPS deal with that?
Yes, I can give you a couple of examples, one in the fixed interest space and one in equities. During the Autumn of 2023 we started to increasingly believe that bond markets were oversold, and we were near a peak in the hiking cycle. We added duration, positioning ourselves for lower yields. During the last couple months of 2023 bond markets rallied as markets priced in a soft landing, leading to our fixed interest portfolio outperforming. Implementing this trade quickly was only possible because of our ability to trade within the Fixed Interest Building Block rather than relying on a rigid platform rebalancing schedule.
At Quilter Cheviot we have a highly knowledgeable and experienced equity research team that sits at the heart of our investment process. The team’s research led us to invest in Darktrace, the British cyber security business, at 300p, towards the end of 2022. Within a couple of months of investing, Darktrace’s stock had declined by around a third, following a short seller attack. Despite the negative sentiment around the stock, our analyst maintained his conviction in the Darktrace management team and we decided to top-up our holding at 260p. The stock price rose throughout 2023 and following an independent third-party review, the company was cleared of any wrongdoing. In early 2024, it was bought by US private equity firm Thoma Bravo, giving us an average exit price of 585p.
Can you give any examples of how you have utilised the enhanced optionality that your structure provides?
Due to the growing weighting of a handful of tech stocks in many passive investments, there is increasing concentration risk in a small number of companies. Investors are often of the belief that passives are diversified, but appearances can be deceiving.
The strong outperformance of US stocks since the 2008 global financial crisis has seen a large increase to their weighting in global benchmarks, rising from just over 40% to a little under 70%. Just three companies — Apple, Nvidia and Microsoft — make up 13% of the US$78tn index! With expectations so high on the Magnificent Seven stocks, there is plenty of room to disappoint. As a case in point, despite the stock doubling last year, we opted not to own Tesla, believing that other stocks have a stronger investment case. The share price has halved this year.
Furthermore, should market conditions change, managers can be stuck with unwanted exposures for longer than necessary. Our structure means that we can act promptly within the funds if necessary and in our view, the current environment provides far more fertile ground for stock picking, which favours our actively managed solution.
How does your MPS compare to passives?
Building Blocks: A smarter way to manage portfolios
Cost-effective access to active management is a key attraction of an MPS. Oswald Oduntan, Investment Manager at Quilter Cheviot, discusses the benefits of active management and how he and the MPS team construct and manage portfolios.
Our strategies are constructed solely using eight purpose-built ‘Building Block’ funds specifically designed for use within Quilter Cheviot’s MPS. This allows a far greater degree of active management without burdensome costs, as we can select individual securities and fine tune holdings to our desired exposure.
As both the MPS model manager and manager of these underlying funds, changes to holdings within each Building Block can be implemented at the fund level in a dynamic manner. This means these changes are immediately reflected across all holders, on all platforms, preventing the need for a portfolio rebalance and all the accompanying operational complexity created by “traditional” MPS. We don’t charge a management fee for running the Building Block funds, removing conflicts of interest; the funds are solely there to enhance the investment proposition.
How is your MPS more active than “traditional” MPS?
Oswald Oduntan
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Olivia Geldenhuys, Head of Investment Specialists
“Longevity risk is perhaps the most difficult to mitigate. The best approach is to have a clear idea of your investment horizon, risk preferences, and the possible scenarios that those might lead to”
But what about clients nearing retirement? If you need to drawdown the money in your portfolio soon, you don’t have the luxury of just focussing on the long-term. Short-term fluctuations can therefore matter greatly – and even eat into the financial security needed to fully enjoy retirement.
Below, we discuss the risks that your clients in drawdown might face, and how they might be overcome. Tatton does not provide advice, but the one thing we always recommend is to use a professional financial adviser when making decisions about retirement needs.
Sequencing risk is the risk of withdrawing money when markets are in a dip, compounding the effect of market falls on the portfolio’s value. Ideally, you would want to buy investments when they are at a low point, and sell them when they peak. But even if it was possible to know those peaks and troughs in advance, clients in drawdown need their money when they need it – even if that is an inopportune time. Inflation risk is the risk that portfolio values are undermined by inflation. Investments can move up and down, but your costs typically only go up. Longer-term investors would expect this risk to be mitigated by long-term investment growth, but clients in drawdown have shorter horizons. Longevity risk is the chance of outliving your portfolio. Repeated withdrawals will eventually empty a portfolio, but the hope is that your investment funds will last for as long as you need them. The complicating factor is that portfolio values fluctuate with markets – and the more time goes on, the higher chance of a market fall large enough to deplete the portfolio’s available cash.
arket volatility can be uncomfortable for investors, pulling down portfolio values in the short-term. For clients in the early stages of their investment journey, the best advice is usually to ignore day-to-day fluctuations and focus on long-term growth.
“If the next 20 years happen to be very bad for capital markets, historical simulations wouldn’t give investors much comfort”
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1. Source: PIMFA 2022
When you start drawing down on your portfolio, you enter a new stage of your investment journey. In this stage, you can face different risks: sequencing, inflation and longevity.
Decumulation risks
The best way to mitigate these risks depends on the investor, so there is no one-size-fits-all solution.
Sequencing risk can mitigated by a so-called ‘bucketing’ approach. This involves splitting up the portfolio into sub-portfolios with different timeframes. For example, one half of the portfolio might be ‘defensive’ to minimise the impact of market falls while the other half might be ‘aggressive’ to maximise long-term growth. Withdrawals could then come from the defensive side in the early years of drawdown, smoothing the transition. This would mitigate sequencing risk in terms of market falls – but it can also mean clients don’t benefit as much from rapid market rises as they might if they were primarily invested in the riskier category.
Inflation risk can be mitigated by holding more equities, as company earnings are usually thought to be inflation-protected. But a higher equity allocation brings other sorts of risks – like the sequencing risk mentioned above. Investors should therefore consider the benefits of diversification. Gold, commodities and inflation-linked bonds can also protect against inflation, ensuring that the real value of your investments is protected.
Longevity risk is perhaps the most difficult to mitigate. The best approach is to have a clear idea of your investment horizon, risk preferences, and the possible scenarios that those might lead to. That ultimately involves seeking financial advice from professional advisers who help investors make financial decisions and plan for the long-term. Financial advice ensures that retirees can make informed choices, safeguarding their financial security over the course of their retirement.
Potential solutions
To help illustrate the considerations above and how they might affect an investment portfolio, we carried out simulations of how Tatton’s model portfolio service might behave while in a drawdown phase, using historical market data. This was to test the likelihood of portfolios meeting clients’ income requirements over a long-term horizon.
The example we simulated was a portfolio of £100,000, intended to provide income for 25 years. We imagined a client wanting to withdraw £500 a month, where the withdrawals increase 3% every year due to inflation. We then analysed how this portfolio would behave across different risk profiles. The table below shows the results – where the percentage numbers refer to the probability that portfolio will sustain withdrawals across different time horizons, up to 25 years.
As the table shows, the ‘aggressive’ portfolio (with a higher equity allocation) is more likely to have enough capital after 25 years to meet investors’ requirements. Interestingly, though, the aggressive portfolio’s chance of maintaining income falls faster than the ‘defensive’ portfolio up to the 20 year mark. Intuitively, this is because a higher equity allocation means higher short-term risks but greater chance of long-term reward.
In any case, it’s important to consider investors’ preferences. Even if a portfolio with a high equity allocation is the most likely to maintain income over 25 years, investors will only get that benefit if they remain fully invested (minus their income withdrawals) for the whole time. Many people become more cautious with their retirement funds as the years pass, but if that meant changing from a high equity allocation to a low allocation when markets are at a low point, you would end up losing money. Clients have to consider whether they would be comfortable with a 70% chance of success, or with taking less income – should they need to.
What’s more, the simulations above are based on historical data – but there is no guarantee that history will repeat itself. Past performance is no indicator of future performance. If the next 20 years happen to be very bad for capital markets, historical simulations wouldn’t give investors much comfort.
An example of a portfolio in drawdown
Retirement planning can be complicated, but investors should always understand their own requirements and whether a portfolio can meet them. Financial advisers are indispensable in helping clients understand their situations, empowering them to make the best informed financial decisions.
At Tatton, we believe strongly in the role of financial advice, which is why we work with advisers to provide the most suitable portfolios for their clients’ needs. Collaboration between investment managers and financial advisers can help mitigate the risks that come about from drawing down on your portfolio – giving clients the confidence and security to enjoy their retirement.
Conclusion
Tatton’s Head of Investment Specialists, Olivia Geldenhuys, discusses the risks that clients in drawdown and potential strategies for mitigating them.
1 year 2 years 3 years 4 years 5 years 6 years 7 years 8 years 9 years 10 years 11 years 12 years 13 years 14 years 15 years 16 years 17 years 18 years 19 years 20 years 21 years 22 years 23 years 24 years 25 years
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100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 99% 98% 95% 91% 88% 83% 78% 73% 68% 64% 59%
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100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 99% 98% 96% 95% 94% 91% 89% 86% 83% 81% 79% 76% 74%
100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 99% 99% 98% 97% 95% 93% 90% 88% 86% 84% 82% 80% 78% 76% 74%
100% 100% 100% 100% 100% 100% 100% 100% 100% 99% 99% 98% 97% 96% 93% 92% 90% 88% 86% 85% 82% 81% 79% 78% 75%
1 yr 2 yrs 3 yrs 4 yrs 5 yrs 6 yrs 7 yrs 8 yrs 9 yrs 10 yrs 11 yrs 12 yrs 13 yrs 14 yrs 15 yrs 16 yrs 17 yrs 18 yrs 19 yrs 20 yrs 21 yrs 22 yrs 23 yrs 24 yrs 25 yrs
arket volatility can be uncomfortable for investors, pulling down portfolio values in the short-term. For clients in the early stages of their investment
journey, the best advice is usually to ignore day-to-day fluctuations and focus on long-term growth.
“Firms will need to develop their investment solutions to offer a flexible and holistic range of investments to suit multiple generations”
Justine Randall, Chief Commercial Officer
“If advisers fail to put plans in place to build a relationship with their inheritors, they risk seeing the assets go elsewhere”
This ‘great wealth transfer’ is expected to happen within the next decade as trillions in wealth is passed down from baby boomers to millennials. This has forced many advisers to think about their client bank, and the longevity of their relationship with them.
One in three (29%) advisers cited client longevity, or an ageing client base as their biggest concern in relation to their advice business, according to a recent report from AKG in association with Charles Stanley and Canada Life.
In the same report, advisers said intergenerational business and multi-generational business (servicing clients’ extended family members) as the most promising development opportunity in the market.
A relatively low hanging fruit for advisory firms who can put a well-structured wealth transfer strategy in place. But where to start?
ntergenerational wealth planning has been a hot topic in the advice space for some time and this article looks at the opportunities and risks facing advisers from the greatest wealth transfer in history.
Advisers spend their entire careers building up a client bank and a wealth of client assets. However, if advisers fail to put plans in place to build a relationship with their inheritors, they risk seeing the assets go elsewhere.
The problem facing advisers is the feasibility of extending their services to clients’ family members. They are (often) younger, so typically they have less current wealth, and therefore do not qualify for advice and fall into the advice gap.
This makes it difficult for advisers to establish a relationship and build rapport with their successors.
A recent report from Scottish Widows said when it comes to clients’ grandchildren, only 12% of advisers said they have established a relationship with them.
Another important point for advisers to consider is the relationship they’ve built with their clients’ spouse as the majority of baby boomers’ wealth is tied up in joint households.
And we know women tend to live longer than men. This means women will be controlling the lion’s share of wealth before the intergenerational transfer takes place.
Understanding the problem
Two in five advisers (40%) listed marketing costs, or issues attracting new clients as their biggest concern about the current advice market. Directing more energy and resource into securing the longevity of existing client relationships could help to address this concern.
Putting an intergenerational planning strategy in place means advisers will spend more time focusing on servicing their existing client base and engaging across generations to retain business. We think this could offer more bang for their buck over the long term.
It’s argued that intergenerational planning is a “win-win” for clients and advisers with clients able to maximise the tax-efficient accumulation of wealth, while minimising the tax on funds withdrawn and transferred.
This could lead to better client outcomes as families are planning on passing their wealth in a tax efficient way. But it’s also good business as advisers retain their client base and build trust through generations and therefore retain wealth over the long term.
Building on existing client relationships
The next generation of wealth owners are going to be vastly different to their predecessors. Growing up in a digital world, with smart phones and managing their money via online banking and apps, means their expectations on how they would like to communicate with advisers will be much different. Firms will need to adapt their proposition to cater for millennials or risk getting left behind.
Firms will also need to develop their investment solutions to offer a flexible and holistic range of investments to suit multiple generations. This can be achieved by offering a discretionary fund management (DFM) service through a third-party.
DFM allows advisers to adopt a hybrid offering with, multi-asset funds or model portfolios suited to younger generations in the accumulation phase of their life stage with more simplistic needs. And then moving to tailored models or fully bespoke portfolios for the older generations with more complex requirements. All while retaining the same investment process and consistent outcomes across the entire family and client journeys.
Outsourcing the investment management element of the advice business model gives back time to advisers to focus on what they do best – driving engagement, building deeper relationships, and ensuring they maintain their client bank through the intergenerational wealth transfer.
Developing advice firms’ proposition
As trillions in wealth shift across generations, financial advisers face both risks and opportunities. Justine Randall, Chief Commercial Officer at Tatton, examines how firms can strengthen client relationships and adapt to changing expectations.
ntergenerational wealth planning has been a hot topic in the advice space for some time and this article looks at the opportunities and risks facing advisers from the greatest wealth
transfer in history.
Investment risks The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Important information This article is for Professional Clients in the UK and is not for consumer use. Views and opinions are based on current market conditions and are subject to change. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.
Invesco’s heritage in managing multi asset investments for our UK clients goes back over 25 years. Explore our MPS range and turn our expertise into your edge.
Alex Crowther, Investment Analyst
“Portfolio managers should focus on delivering the best possible portfolios for clients rather than being overly constrained by relatively minor factors”
“Instead of targeting volatility, we structure portfolios by risk profile and apply a 10% drift tolerance for rebalancing”
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isk is part and parcel of investing; it allows clients to achieve their goals by taking advantage of the nature of capital markets. As the old adage goes, with no risk comes no reward.
There are two main ways managers can help identify risk levels for clients: ‘risk targeted’ and ‘risk mapped’ portfolios – both have their advantages and limitations.
With risk mapping, an adviser matches an investor to a portfolio based on their needs, tolerance, and objectives. The investment manager designs the portfolio, detailing its characteristics, while a provider assigns a risk rating using specific metrics. This typically involves assessing future volatility based on asset allocation, capital market assumptions, asset correlations, and historical data.
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What’s the difference between risk mapping and risk targeting?
Firstly, both strategies support advisers in navigating tightening FCA restrictions and the consumer duty requirements. They offer a clear rationale for client recommendations by documenting how risk tolerance and appetite are taken into account, which can help streamline the process by reducing time and costs associated with evidencing recommendations.
Additionally, outsourcing portfolio construction decisions can help to de-risk an adviser’s business. Instead of shouldering the responsibility of fund and portfolio selection and allocating significant time and resources to match investments to each client’s specific circumstances, advisers can rely on portfolio managers to handle this aspect. This frees advisers to focus on other critical areas of financial planning.
Finally, these strategies can enhance client communication and understanding. While risk management is complex—touching on factors like capacity for loss, risk tolerance, and time horizon—summarising the result into a single risk number can help clients more easily visualise their position.
Risk targeting takes an almost opposite approach. A portfolio manager constructs a portfolio to fit a set risk profile, selecting assets to match that model. Often, DFMs or asset managers buy asset allocation models from risk rating providers (e.g., Defacto) and manage portfolios accordingly. In theory, this eliminates the risk of moving between volatility bands.
What are the advantages of these strategies?
Like most aspects of investing, these strategies have their limitations. In their recent report, Risky Business, NextWealth spoke to advisers regarding their views on risk mapping and targeting and found that 57% of advisers rely heavily on these risk ratings it was found that ‘there is little value’ in the risk targeting framework.
The main drawback of risk mapping is the potential for higher portfolio volatility. Markets are inherently unpredictable, and assets can behave unexpectedly—such as the simultaneous declines in bonds and equities in recent years. These events are hard to anticipate, and risk mapping may not fully account for them, which can be concerning for less sophisticated investors.
Both risk-mapped and risk-targeted portfolios require regular adviser-client reviews to ensure asset allocation aligns with the client’s evolving profile amid life changes.
The most notable drawback of risk targeting is the tendency to retrofit portfolios to match a predetermined risk tolerance. This can lead to a ‘tail wagging the dog’ scenario, where asset selection is more about fitting a set risk profile than optimising portfolio performance.
Like risk mapping, volatility poses challenges in risk targeting. Investment performance and volatility are never guaranteed, making strict risk-level adherence difficult. Managers aiming to target specific volatility bands face a complex task, relying on past volatility (which is flawed) and assumed volatility (which can differ significantly from reality). If assumptions shift, increased rebalancing costs and time out of the market may follow—ironically, this could be more harmful than staying in a portfolio with slightly higher risk.
Both strategies also risk oversimplifying risk by focusing primarily on volatility. Risk is multidimensional, and other factors, such as max drawdown—the largest loss from peak to trough—should also be considered.
Timeline’s research revealed that portfolios with 30–60% equity content actually experienced the lowest max drawdown levels. This middle-weighted allocation appears to better balance assets, reducing extreme losses during market downturns since December 2016.
Max drawdown is an essential consideration for investors and advisers alike and is often overlooked in risk ratings. Failing to incorporate factors beyond volatility can create an incomplete picture of a portfolio’s true risk.
What are the potential disadvantages?
Risk-targeted solutions aim to keep portfolios within a set volatility range by adjusting asset allocations. Providers typically use recent data and forward-looking estimates to set a target volatility, rebalancing when deviations occur. While this may seem precise, frequent rebalancing based on short-term fluctuations can disrupt portfolio structure.
Timeline takes a different approach. Instead of targeting volatility, we structure portfolios by risk profile and apply a 10% drift tolerance for rebalancing—adjusting only when asset weightings shift by more than 10%. This allows natural fluctuations, reducing unnecessary intervention while capturing market momentum.
Our in-house research compares risk-mapped and volatility-targeted approaches, showing minimal differences in long-term outcomes. Using static 50/50 and 30/70 portfolios of equities and fixed income, we measured realised volatility each quarter. We then simulated rebalancing for a 40/60 portfolio when volatility thresholds were breached.
The chart below (Jan 2000–Dec 2023, gross of fees and transaction costs) illustrates that both methods produce nearly identical results, despite volatility-targeting appearing more "sophisticated." In reality, it achieves much the same as a 10% drift tolerance.
What is not shown in the graph above is what the impact of potential periodic rebalancing might have on the volatility-targeted approach. This would not only take funds out of the market during these rebalances, but also increase transaction costs for the clients. This periodic rebalancing can actually impact client returns significantly and result in a difference in performance of up to -36bps compared to a tolerance rebalancing based approach.
In short, our risk-mapped approach minimises unnecessary rebalancing, avoids reacting to temporary market noise, and keeps the focus on the overall portfolio structure rather than chasing perceived ‘sophistication’.
Why Timeline prefers a risk-mapped approach
Both risk targeting and mapping are useful tools for advisers, providing a clearer understanding of what to expect in terms of portfolio volatility and performance. However, it’s important to avoid letting the tail wag the dog. Portfolio managers should focus on delivering the best possible portfolios for clients rather than being overly constrained by relatively minor factors.
At Timeline, we believe that a risk-mapped approach strikes a more effective balance. By setting a 10% drift tolerance, we allow for natural market fluctuations without the need for frequent rebalancing that often results from targeting short-term volatility levels. Risk targeting may appear more sophisticated, but it leads to nearly the same results as a risk-mapping approach—only with more turnover and potentially higher costs.
In conclusion
Alex Crowther, Investment Analyst at Timeline, explores the differences between risk-mapped and risk-targeted portfolios, weighing their advantages, limitations, and real-world impact on portfolio performance.
Xxxxxx xxxxx, Xxxxxxx xxxxxxx xxxx
isk is part and parcel of investing; it allows clients to achieve their goals by taking advantage of the nature of capital markets. As the old adage goes, with no
risk comes no reward.
2. humancapital.aon.com.
Laurentius van den Worm CFA, Head of Investment Strategy
“If index funds reliably deliver better returns at a lower cost, why do some advisers still nudge clients toward pricier, underperforming active strategies?”
After hearing this argument one too many times and wondering how to respond without stepping on too many toes, I turned to our professional community on LinkedIn to gain insight on why index funds might actually be unsuitable for the ultra-wealthy.
The responses were... enlightening. Most pointed to perceptions around prestige and exclusivity. Some comments were sarcastic while others leaned a little too hard into honesty, claiming that if it looks simple, it’s less appealing.
But one comment really stuck with me: “Maybe it’s just not fun to chat about on the golf course.” There’s a kernel of truth here. In some circles, index funds are dismissed as “too ordinary” for HNW clients, no matter how consistently they deliver. That perception problem alone can make it hard for advisers to recommend indexing, even if it’s the option that is constantly delivering the best returns at the lowest cost.
So the resistance to index funds for HNW and UHNW clients often has more to do with appearances and protecting the high-fee world of active management than actual investment performance. But for anyone genuinely focused on wealth preservation and steady growth, index funds should be a no-brainer. They offer broad diversification, low fees, and a transparent approach to capturing market returns.
There’s still a lingering belief that index funds aren’t “good enough” for high net worth (HNW) and ultra high net worth (UHNW) clients.
So why the hang-up on “more complex” strategies?
“The tough reality is that if clients were better off with simpler portfolios, focusing on low-cost index funds and avoiding complex alternatives, the traditional investment model would struggle to stay relevant”
here's an unspoken rule in the finance industry that the wealthier the client, the fancier you must dress up. I like to call this the "Fancy Suit Fallacy." One of my mentors used to say, “People in corporate wear suits to mask incompetence. They use style to hide a lack of substance.” In wealth management, we see this same “fancy suit” logic applied to investment strategies.
Advisers often assume that ultra-high-net-worth clients need complex, high-fee strategies to achieve solid returns. But the truth? These opaque, intricate structures are often little more than a stylish cover for lacklustre performance.
Here's some food for thought for those still doubting whether index funds suit UHNW clients. A closer look at family offices, the investment and administration arms of some of the wealthiest people on the planet, shows that index strategies aren’t just “acceptable”; they’re foundational. According to Fidelity’s 2023 Family Office Investment Study, roughly 45% of family office assets are in public equities, with 47% of these offices invested in direct indexing strategies . Within that 47%, direct indexing typically represents 20% of the portfolio, covering nearly half of their listed equity exposure.
1. Fidelity Source...
2. 2013 Letter to Shareholders.
3. Floyd, D., & Belvedere, M. J. (2016–2019). Warren Buffett’s $1 million bet against hedge funds: An eight-year lesson in low-cost investing. Investopedia.com Yahoo Finance
Direct indexing is essentially a customised version of traditional indexing, where assets are tailored to fit specific client needs. This might include tax benefits or small adjustments to tilt the portfolio toward certain sectors or values. But at its core, the approach remains the same: broad, low-cost market exposure.
While active strategies still dominate family offices, most have shifted to a “core-satellite” approach. This is where index funds form the core of the portfolio, providing low-cost exposure to the global market, while active management is used sparingly for added nuance. The takeaway? If billion-dollar family offices are using index strategies as acornerstone, the idea that millionaires need something “more complex” doesn’t hold water.
But this wasn’t the first time Buffet came out supporting index funds. In 2007, he made a $1 million bet with Protégé Partners, a hedge fund firm, to show that an S&P 500 index fund would outperform a group of hedge funds over ten years . Buffett’s logic was straightforward: high fees and complexity would weigh down hedge fund returns, while the index fund would benefit from low costs and the steady growth of the broad market. And he was right. Over the decade, the index fund gained 125.8%, while the hedge funds averaged only 36.3%.
This bet became a landmark moment for passive investing, highlighting how, for most people, tracking the market is more rewarding than trying to outsmart it.
Even the wealthiest are turning to indexing
Speaking of wealthy folks who know a thing or two about keeping it simple, Warren Buffett has thrown his support behind index funds several times over the years. In 2013, he famously instructed the trustee of his wife’s inheritance to allocate 90% of it to a low-fee S&P 500 index fund and the remaining 10% to short-term government bonds . His reasoning? Over the long haul, simple indexing would provide better returns at a fraction of the cost of most active strategies.
Warren Buffett’s vote of confidence for Index Funds
Author and investment adviser Mark J. Higgins highlights a tricky conflict of interest in the industry: Investment managers can often pocket more by promoting high-fee active funds that come with commissions or revenue-sharing perks.
The tough reality is that if clients were better off with simpler portfolios, focusing on low-cost index funds and avoiding complex alternatives, the traditional investment model would struggle to stay relevant. It’s a brutal truth to confront, and this conflict of interest often skews judgement. That’s why many firms continue to position themselves as experts in asset allocation and manager selection, even if the evidence doesn’t fully support their claims.
With all these perks of index investing, you might wonder: if it’s so fantastic, why isn’t every investment pro shouting it from the rooftops? If index funds reliably deliver better returns at a lower cost, why do some advisers still nudge clients toward pricier, underperforming active strategies?
The unspoken conflict of interest
For advisers who genuinely want to put their clients first, maybe it’s time to rethink the obsession with complex portfolios and the relentless chase for “exclusivity.” We’ve seen that most times, a straightforward, low-cost strategy not only offers better results but also builds a more transparent, trusting advisor-client relationship.
A final thought
Passive investing isn’t just for the everyday investor—it’s a cornerstone strategy even for the ultra-wealthy. Despite lingering perceptions that high-net-worth portfolios require complexity, the evidence overwhelmingly supports low-cost, broad-market exposure says Laurentius van den Worm CFA, Head of Investment Strategy.
here's an unspoken rule in the finance industry that the wealthier the client, the fancier you must dress up. I like to call this the "Fancy Suit Fallacy." One of
my mentors used to say, “People in corporate wear suits to mask incompetence. They use style to hide a lack of substance.” In wealth management, we see this same “fancy suit” logic applied to investment strategies.
2. 2013 Letter to Shareholders. 3. Floyd, D., & Belvedere, M. J. (2016–2019). Warren Buffett’s $1 million bet against hedge funds: An eight-year lesson in low-cost investing. Investopedia.com / Yahoo Finance
