Why Risk Rating Your Investment Solutions Can Make You Stand Out From the Crowd

In this blog, we'll discuss the key benefits of risk rating your investment solutions and why they can help you achieve better long-term investment outcomes for your clients while helping your investment solutions stand out in a crowded market giving your business growth.

Introduction

As the investment management industry becomes more competitive, we recognise that asset managers, discretionary fund managers (DFMs) and MPS providers continuously seek ways to differentiate their respective investment products and services. 

Since the global financial crisis of 2008, investors have flocked to multi-asset investment products. Many of these investments would have been made following recommendations from financial advisers. This growing popularity with advisers emphasises the need to differentiate your investment product and services, which is where risk ratings come into play.

According to Morningstar data, assets in multi-asset solutions, including ETFs, reached $4 trillion in 2020, up from roughly $1 trillion in 2008.

What factors do advisers consider when selecting funds for clients?

When selecting a fund for their clients, advisers will consider several factors. Firstly, determining the client's investment objectives and risk tolerance, investment style, and diversification will guide the fund selection process. 

Performance is another crucial factor, with advisers analysing a fund's historical track record and fund manager's experience. Although the old adage says, “past performance is not a guide to future returns”, we know past performance still has a bearing on a fund’s appeal in reality. Fees and expenses associated with the fund are also considered during this process, as fees can erode any potential returns or income a client receives over the lifetime of their investment and financial plan. 

Advisers must match the fund's characteristics with the client's investment goals, risk tolerance, and overall financial plan. This is where risk-rating your investment solutions can help you differentiate your products and services and help advisers make the most suitable fund recommendations that achieve better long-term investment outcomes for their clients.

The benefits of risk-rating your multi-asset investment solutions

Here are some of the ways fund risk ratings can help you beat the competition:

Ensures your product offering is suitable for clients' risk appetite

Firstly, you can help your adviser clients meet their regulatory requirements by risk-rating your multi-asset investment range. For example, regulators require advisers to ensure that their clients' investments suit them, considering their investment objectives, financial situation, and risk tolerance. By assigning a risk rating to your funds or portfolios, you can demonstrate to advisers that you have taken appropriate steps to ensure their investments match the advice recommendation.

Secondly, as there are regulatory requirements for your business to ensure the target market for your funds is clearly identified (as part of consumer duty), the risk profile of your fund ranges helps to do this as well.

Simplifies the fund selection process for both advisers and their clients

The process of risk rating can also improve transparency. For example, different funds and portfolios may present different investment strategies and underlying asset allocation blends, making it difficult for advisers to compare and recommend the most suitable option for their clients. By rating your funds or portfolios, you can provide advisers with a clear and consistent way of reaching your products. As a result, it helps them to recommend the most suitable investment for their clients.

Builds stronger relationships with your adviser clients

Another benefit of risk rating is that it delivers better adviser engagement. By providing advisers with an efficient process and a clear understanding of the risk profile of their clients’ investments, you can help to build trust and confidence with advisers and their clients. And it's a much easier process for the adviser if they simply have to pick the fund that matches their client's risk. Additionally, advisers can easily move their clients between your risk-rated funds as the client’s financial situation or risk appetite changes, giving the longevity of their assets across your funds and reducing the likelihood of them moving to a competitor. This can increase client satisfaction and loyalty, boosting Assets Under Management (AUM) and revenue streams. 

Empowers advisers to inform better investment decisions

In addition, risk rating can support better investment decision-making. Advisers can improve client outcomes by helping clients select investment options that align with their risk profile. This leads to more clients achieving their investment goals when investing in products that align with their risk tolerance and investment objective, as the fund performs in line with the clients’ expected level of risk and reward.

Identifies potential risks so you can take action proactively

The risk rating can help you improve your risk management process. By assigning a risk rating to your funds or portfolios, your team can better understand the level of risk of your fund or portfolio. In doing so, you can reduce the likelihood of losses, improve your understanding of how funds might perform during a range of underlying market conditions, and means you can proactively make changes if required. In addition, you can better communicate the ‘risk and reward’ profile of the fund or portfolio, which will help advisers manage their clients' understanding and expectations.

Expands your reach and grow your business with ease

Lastly, risk rating can be used as a marketing tool to attract advisers looking for a range of low-risk to high-risk investment options for their clients. By clearly communicating the risk level of your funds or portfolios on your marketing collateral or online portals, you can attract more investment from those seeking a specific risk profile. One barrier to investing in your funds could be that they do not have a risk rating, as you are excluded from any fund search on that criteria. A risk rating can be a powerful tool to ensure you can cater for any adviser looking to invest.

Conclusion

Risk-rating your multi-asset funds or model portfolios can provide a range of benefits for your investment proposition. From meeting regulatory requirements to enhancing client engagement and improving risk management, risk ratings can help you differentiate your products and services and help advisers make the most suitable fund recommendations that achieve better long-term investment outcomes for their clients. So, consider risk-rating your funds or portfolios and take advantage of their benefits.

How can we help?

At EV, we provide the UK's fastest-growing risk rating service in the market, boosted by the UK's most used risk profiler by advisers with their clients.

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