Tweak your existing investments only if it furthers your goals

Financial advisers typically first meet clients when they already have existing investment portfolios. The first step for me, as an adviser, is to do a detailed analysis of how you, as a client, are currently invested and to answer these questions:

• What is the overall asset allocation of the portfolio?
  
  
• How much do you hold in growth assets such as equities and listed property?
  
  
• How much is invested in more defensive assets such as cash and bonds?
  
  
• How much is invested with a local focus and how much is invested with an offshore focus?
  
  
• What is your split between retirement funds and discretionary investments (tax free savings accounts, unit trusts, endowments, share portfolios and cash investments)?
  
  

Allocation aligned to goals

Your asset allocation needs to be aligned with your goals, the target date for those goals (such as your retirement date) and the rate of return you need to achieve your goals. It should also take into account your individual preferences.

The higher the rate of return you require, the higher the allocation to growth assets needs to be. We determine this by quantifying your goals and then forecasting the future value of your existing investments and future contributions to them.

If this required return is higher than what can reasonably be expected from a portfolio with high exposure to equities for the long term, it may indicate that you need to contribute more towards your future goals rather than taking undue or extreme investment risk.

Your risk tolerance and risk capacity (the other two components of your profile, alongside the required return/risk required) must also be considered. Your risk tolerance refers to how much market volatility you are comfortable with. A higher equity exposure means higher volatility. Risk capacity is how much risk you can afford to take based on all aspects of their financial and family lives.

Why you need discretionary investments

Flexible or discretionary investments are an essential component of your portfolio. These investments give you access to lump sums as and when you may require them in future. This is key for big-ticket items such as purchasing cars and funding holidays.

You are entitled to take up to one third of your retirement funds as a cash lump sum when you retire. This lump sum is subject to tax and it may not be enough to cover all your future flexible needs – especially if you have taken withdrawals.

It is therefore very important to build a discretionary investment portfolio alongside your retirement fund.

Checking for performance

The underlying funds and portfolios of your existing investments also need to be analysed to ensure that they have a history of long-term outperformance, at reasonable cost and are well managed, thereby giving them every chance to continue to perform well in future.

A comparison should be done between these funds or portfolios and what I, as an adviser, believe the best solutions in the market are for the required mandates.

I don’t believe in changing investments for change’s sake. Especially if there are cost or tax implications involved. It is only when the existing portfolios have underperformed, are prohibitively expensive or there are other valid concerns about the management of the portfolio, that I will recommend a change.

The analysis of the overall asset allocation and the underlying investment also helps identify any unnecessary risks that you may face and provides an opportunity to mitigate them, with particular attention to the following questions:

• Do you have too much in a particular asset class?
  
  
• Do you have too much in a single share or instrument?
  
  
• Do you have too much in a single market and/or market sector?

It is also important to consider tax and estate duty implications of your portfolio now and in future.

A real-life example

Let me give you a real-life example of this. A client came to me recently with an investment portfolio with an asset allocation reflected in the table below. 

This person was in their middle 60’s and due to retire soon. The equity allocation and the offshore allocation of their portfolio were insufficient to meet their long-term needs.

I recommended changing the portfolio to the allocation in the table alongside and you can see the comparison in the graph below.

This allocation has sufficient equity, property and offshore to meet their future needs and is aligned with their risk profile.

I was also able to reduce their investment management and administration fees, making it cheaper for them to work with me overall, even though I charge an advice fee as a percentage of assets under management.

This is why it is important to share with an adviser all the investments you have and to let them get a complete understanding of what you have and how it meets your goals