Portfolio Planning

Portfolio Planning – Art and Science

Now that we have all returned from holidays and are gearing up for new business there have been a couple of interesting articles during August that focus on how advice and investment decisions are reached. In different ways they highlight the need for a disciplined decision process as fundamental part of the investment adviser/manager proposition.

At the same time we were also fortunate to attend a Personal Finance Society conference where M&G Investments made two presentations, one in particular focusing on the “Art of Portfolio Planning”.  The core of the presentation being that increasing investor longevity will place greater emphasis on accepting more risk in a portfolio for a longer period of time to achieve the returns required to meet the investor’s stated objectives.

This effectively boils down to the challenge of discussing what risk an investor needs to accept in order to achieve their objectives, which can be quite different from the amount they might first be willing to accept.

The knock on effect is that your advice may well have to incorporate bolder decisions and as such you will want know that you have done all that you can to ensure each decision is more effective.

Advice Planning

Can You Improve Your Decision Making and Associated Advice?

If you are interested in the field of behavioural economics, Lazard Click here published a paper highlighting the flaws in subjective analysis processes that might be compensated for by cross referencing more “mechanical” decision making processes.

If you are unaware of behavioural economics it is an evolving area of study which looks at the manner that we as humans make all sorts of economic decisions. The results of many of these studies have significant implications for financial services and in particular understanding the investment decision makers themselves.

In short, as individuals we are prone to making two types of decisions, either instant snap decisions or more considered and researched decisions. However, the flaw in this process is that we tend to compile our research with a bias towards validating the snap decision that we first made.

With this in mind in an investment environment, it becomes important to consider how we might avoid compounding our poor decisions while allowing our best decisions to prosper.

The Lazard article goes on to demonstrate that almost any form of balancing information or research process can significantly improve the quality of decisions that you as an adviser or investment manager can make.

It is important that your decision making process contains an angle or stage that is put in place to challenge your initial train of thought.

On a separate but related theme Ian McKenna published an article Click here at the beginning of the week highlighting the advances being made in adviser decision making processes in the United States.

It appears that the American market is leading the way in retail financial services best practice where an increasing element of their advice field is being qualified by evidence based processes. Ian’s article focuses on the use of algorithmic methods for supporting decision making processes.

This is not suggesting that the use of systematic or mechanical processes should replace the qualitative or intuitive value that an adviser or investment manager can ultimately add to the client relationship. However, incorporating a mechanical element in to the decision making process can improve decision making simply by virtue of its existence let alone the quality of its output.

Given the fact that we are faced with the prospect of possibly challenging client’s with the need to accept greater risk in their investment planning it does make sense that each decision that underpins that advice must be anchored in a well-defined process and certainly underpinned with evidence rather than a series of subjective opinions and accumulated assumptions which very often have a limited shelf life.

Beyond what we do and the way that we do it we think that it is important that decisions are made:

  • At the appropriate time;
  • For the right reasons; and
  • To give the greatest opportunity to succeed.



Clearly, we place a great deal of emphasis on having the evidence and the objective means to produce it as part of our analytical processes.

More recently an article by Cedric Bucher on IFA Online Click here reasserts that outsourcing investment management is not the end of your responsibility as an adviser. You remain the link between the continuous risk profiling of the client and the suitability assessment of their investment portfolio.

Factoring in the “Art of Portfolio Planning” and the challenges of making a portfolio work for a client beyond their selected retirement date and in to their extended old age, the best of advisers will have to challenge client attitudes to risk acceptance and capacity.

We think that this is going to be one of the key differences between the successful adviser or investment manager post RDR and the others. This of course will translate in to those that make a living in financial services and those that make an excellent living by delivering client value.

Have You Acquired All of Your Business Components?

It is worth summarising the recurring points as we complete the final furlong in the run up to the RDR deadline.

  • Clients must plan for a longer retirement period and probably after working for longer;
  • Clients must consider the need to accept greater investment risk before and after retirement;
  • The adviser must continually monitor the risk appetite and capacity of the investor and the nature of their portfolio; and
  • As humans we must compensate for flaws in our own decision making processes by challenging our bias towards validating our snap decisions.

Ask yourself, do you have a clear methodology for advising clients when it comes to your risk profiling and specifically your asset allocation processes?

Importantly, have you incorporated a mechanical or systematic element in this process to challenge potential for “snap” decisions based on a collection of subjective sources and their range of assumptions?

Remember there is a significant improvement in effective decision making by having any form of independent information source regardless of its own quality.

We obviously believe that our analysis provides a meaningful statistical edge in identifying key trends across asset classes, markets and industry sectors that can augment your own decisions when considering client asset allocations.

Follow us on Twitter and have a look at how we build a picture of quarterly and semi-annual trends through our weekly reports.

Keith Reid
Keith Reid
Keith’s training as an accountant and auditor has emphasized the importance of evidence in all good decision making process. The ability to monitor management processes effectively is a key to making the most of business opportunities. Both Keith and Gerry believe that this priority for capital preservation is the common principle that sets the framework for any sound investment strategy or business model.