Risk questionnaire - Asset allocation
Across the industry the advisers' favoured approach is to invite clients to complete a risk questionnaire. This will score you and categorise you as cautious, moderate, adventurous. We then add in a likely term – and a system based asset allocation is generated e.g. 50% UK equity 50% govt bonds.
The system provider we use , e-value, is used in the UK by over 2500 financial advisers – so the advice we give is conventional, mainstream advice. The hope is you would expect similar recommendations from other advice firms.
The biggest single factor influencing the shape of investment performance is the asset class you invest in. By asset class we mean equities ( or shares as they are called ) is a class, cash is also a class as is property. A portfolio approach - investing across a variety of asset classes is recommended, to spread risk and smooth out returns. We can further subdivide equity geographically, say UK or US funds , and fixed interest, UK, global, or govt and corporate. We can therefore have a risk spectrum, starting with cash, then government fixed interest, corporate fixed interest, through to property, UK equity through to emerging market equity.
Therefore an attitude to risk/capacity for loss and a term can be reflected by adjusting the percentages in each asset class – an ultra cautious risk person, with a short term, might have all in cash, an adventurous person with a long term might have all in equities and so on
Because the case for investing in more volatile assets -such as equities - is in the length of time invested, we sometimes break down the pension fund into segments – 0-2 years, 3-6, yrs, 7-12 years 13 yrs plus – the 0-2 year segment might be in cash as it will be needed soon, the 13 year plus might be significantly in equities, for growth. Each year at review , and after a year's income has been taken, we have an opportunity to replenish the segments - a so called cascading effect
Cash flow planning
This allows the adviser to incorporate other income streams, such as state pension and their arrival at a point in the future – so reflect a possible reduced need for a draw on your pension fund. We can map this out in to a plan, and can take inflation and future events into account - in this way we buuild up a financial plan.
Circumstances change and this allows us to reflect that in our arrangement of and planning of your pension
This maintains the asset allocation
Quite simply if you have 50% of your money in cash and 50% in shares, that is an agreed asset allocation. If after 12 months, the shares have increased in value by 10% and you have had no interest on your cash you will have an asset allocation of 55% shares and 45% cash – selling the 5% growth of your equities and putting it into cash would be described as rebalancing.
Cost acts as a drag on investment returns. Most moderate risk investors might have 50% in equities and you might expect a return of roughly 5%, according to FCA guidelines – so an annual cost of 0.6% means your returns are reduced to 4.4%.
Pay very close attention to the annual costs – many people are paying nearly, or in excess of, 2% per annum and aren’t aware
Tip – ask your current provider how much you’re paying!