Download Working Life

It’s Not About The Answer;
It’s More About The Question!
Business Development Manager (Investments)
For adviser use only – not approved for use with clients.
Building a bridge allegory
Learning outcomes
 Understand the different characteristics of risk
 Understand how different funds can work alongside a risk
assessment process
 Understand the post R-day development of adviser models
 Understand why volatility is not a proxy for risk
 Understand how to select tactics to support your strategy
 Understand how to add value to your investment client
relationships
 Understand how Prudential’s fund range works in
conjunction with the Verbatim Investment process
Dynamic Planner mapping
All tax wrappers and platforms
7
Additionally for
Pru Pensions/Onshore Bonds
Additionally for
International Prudence Bond
Adventurous
Portfolio
6
PruFund 40-80
Balanced
Portfolio
5
Cautious
Growth
Portfolio
4
Cautious
Portfolio
Cautious
Managed
Growth
PruFund 20-55
PruFund 10-40
PruFund
Growth
PruFund Protected Growth
3
Defensive
Portfolio
Managed
Defensive
PruFund 0-30
PruFund
Cautious
PruFund Protected Cautious
PruFund
Growth
PruFund Protected Growth
PruFund
Cautious
PruFund Protected Cautious
Outsource some process
using Multi-Manager/MultiAsset - retain fund
selection, but use 3rd party
research
DIY – retain all investment
responsibility and construct
own portfolios
VI tier 1 and 2
VI tier 4
Outsource all of the
process to bespoke or
managed DFM service
Outsource some process
using “model portfolios” –
investment responsibility
retained, but use of
3rd party fund selection
VI tier 5
VI tier 3
Less
Fund selection
More
What is your investment strategy?
Less
Asset allocation
More
Adviser service differences
Top tier: Require £179,000 in assets (£88,000 median)
74%
Proportion on actively managed funds
63%
Proportion of clients on platforms
18%
Proportion DFM used for investment
selection
44%
Proportion where Model Portfolios
used
0%
© GfK 2012 I RDR survey 2013 I November 2013
20%
40%
60%
80%
100%
Time spent on servicing clients
Total
Portfolio Managers
Generalist
Flexible Model
66
52
55
38
38
34
31
37
32
32
30
28
34
26
26
18
25
20
21
15
15
13
15
17
7
Finanical
planning
Investment
rebalancing
Determining
current
investment
valuations
© GfK 2012 I RDR survey 2013 I November 2013
Product research
Tax planning
Product
comparisons
6
7
7
Illustrations
Assessing suitability
Firms should ensure:
 they have a robust process for assessing the risk a
customer is willing and able to take
- including appropriately interpreting customer responses to
questions and not attributing inappropriate weight……
 tools, where used, are fit for purpose and any limitations
recognised and mitigated;
 they have a robust and flexible process for ensuring
investment selections are suitable given all aspects of a
customer’s investment objectives and financial
situation……”
Source: FSA, March 2011 Assessing suitability: Establishing the risk a customer is willing & able to take and making a suitable investment selection
Assessing Suitability – FCA update
Defining Risk
Asset Allocation Tools
Advisers need to understand
“concerned" about
how they work and when to use
clients having a
them….and remember they have
number as the only
limitations and will not give you
definition of their
the right answer in every
risk tolerance. ……
circumstance
Source: Comments by Rory Percival, Technical Specialist at Financial Conduct Authority, at Defaqto DFM conference in October 2013
True diversification?
Civil servant with
low tolerance for
risk score
Investment portfolio
dominated by asset
classes such as
bonds
Entrepreneur with
high tolerance for
risk score
Investment portfolio
dominated by asset
classes such as
equities
Investing in human capital
£2,000,000
£1,800,000
£1,600,000
£1,400,000
£1,200,000
£1,000,000
£800,000
£600,000
£400,000
£200,000
£0
0
2
4
6
8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60
Working Life - yrs
Human capital
Hypothetical example purely for illustration purposes
Investing in human capital
£2,000,000
£1,800,000
£1,600,000
£1,400,000
£1,200,000
£1,000,000
£800,000
£600,000
£400,000
£200,000
£0
0
2
4
6
8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60
Working Life - yrs
Human capital
Hypothetical example purely for illustration purposes
Financial capital
Investing in human capital
£2,000,000
£1,800,000
£1,600,000
£1,400,000
£1,200,000
£1,000,000
£800,000
£600,000
£400,000
£200,000
£0
0
2
4
6
8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60
Working Life - yrs
Human capital
Financial capital
Hypothetical example purely for illustration purposes
Total wealth
True diversification?
Civil servant with
low tolerance for
risk score
Investment portfolio
dominated by asset
classes such as
bonds
Entrepreneur with
high tolerance for
risk score
Investment portfolio
dominated by asset
classes such as
equities
Risk is not just a (vol) number
 Investment term and purpose
 e.g. Pension vs ISA
 Funding specific need e.g. Mortgage / Education
 Risk goes beyond numbers and volatility
 Capital loss, circumstance change, interest rates, inflation,
counterparty, longevity, timeframe, fund characteristics etc.
 Volatility’s not necessarily a bad thing
 Selling good assets at the wrong price could be a bad outcome
 Objectives, constraints and beliefs are key in
managing risk
Volatility gives no clear signal for losses
Evaluating risk: Managed solutions
Spread
Sharpe
Shape
Volatility scatter: Spread & Shape
44
A
Performance %
40
B
C
36
D
E
F
32
H
G
28
I
24
20
16
0
1
1
2
2
3
3
4
4
5
5
6
6
Ann Volatility %
7
7
8
8
9
9
10
10
Performance
Ann Volatility
A
Adventurous Portfolio P Acc
40.49
10.43
B
Balanced Portfolio P Acc
36.34
8.34
C
Cautious Growth P Acc
35.62
7.51
D
IMA Mixed Investment 40%-85% Shares
35.06
8.69
E
IMA Flexible Investment
32.83
9.91
F
Cautious Portfolio P Acc
31.55
6.11
G
IMA Mixed Investment 20%-60% Shares
27.47
5.67
H
Defensive Portfolio P Acc
27.13
5.09
I
IMA Mixed Investment 0%-35% Shares
21.73
3.91
Source: FE Analytics. Bid-bid performance vs volatility scatter chart over 48 months from 31 May 2010 to 31 May 2014 from IMA universe.
11
Sharpe
Return
Sharpe
Volatility
IMA Mixed Investment 0%-35%
5.04
1.29
3.91
Defensive Portfolio
6.19
1.22
5.09
IMA Mixed Investment 20%-60%
6.25
1.10
5.67
Cautious Portfolio
7.10
1.16
6.11
Cautious Growth Portfolio
7.92
1.05
7.51
IMA Mixed Investment 40%-85%
7.80
0.90
8.69
Balanced Portfolio
8.06
0.97
8.34
IMA Flexible Investment
7.36
0.74
9.91
Adventurous Portfolio
8.87
0.85
10.43
Source: FE Analytics. Ratios table over 48 months from 31 May 2010 to 31 May 2014 from IMA universe.
Building a bridge allegory
PruFund EGRs
Life
Pensions
PruFund 0-30 Fund
PruFund 0-30 Pension Fund
5.60%
PruFund 10-40 Fund
6.90%
PruFund 10-40 Pension Fund
6.00%
PruFund 20-55 Fund
7.30%
PruFund 20-55 Pension Fund
6.20%
PruFund 40-80 Fund
7.60%
PruFund 40-80 Pension Fund
6.50%
PruFund Cautious Fund
7.90%
PruFund Cautious Pension Fund
5.80%
PruFund Growth Fund
7.20%
PruFund Growth Pension Fund
6.40%
7.70%
Learning outcomes
 Understand the different characteristics of risk
 Understand how different funds can work alongside a risk
assessment process
 Understand the post R-day development of adviser models
 Understand why volatility is not a proxy for risk
 Understand how to select tactics to support your strategy
 Understand how to add value to your investment client
relationships
 Understand how Prudential’s fund range works in
conjunction with the Verbatim Investment process
PruFund Growth & Cautious
PruFunds Performance & Volatility
60
Mean Ann Volatility of 4.12
55
A
50
Performance %
45
40
B
35
C
30
Mean performance of 28.85
D
25
E
20
15
10
5
F
0
0
1
2
3
4
Performance
Ann Volatility
A
ABI UK All Companies
52.71
11.92
B
PruFund Growth
36.89
2.32
C
PruFund Cautious
32.81
1.85
D
ABI Mixed Investment 20%-60% Shares
26.59
5.32
E
ABI Mixed Investment 0%-35% Shares
22.05
3.32
F
Bank of England Base Rate
2.02
0.01
5
6
7
8
Ann Volatility %
9
10
11
12
Source: FE Analytics. Bid-bid performance vs volatility scatter chart over 48 months from 31 May 2010 to 31 May 2014 from UK ABI Insurance universe.
13
Dynamic Planner & Prudential
Source:
Distribution
Technology
Report Q1 2014
Building a bridge allegory
Three key Prudential points
 Uniquely placed in terms of number of funds
across relevant Verbatim risk profile scores
 Our risk managed solutions incorporate:
 Strategic asset allocation
 Tactical asset allocation
 Behavioural finance
 PruFunds offer unique availability of smoothed
returns and lower volatility
Learning outcomes
 Understand the different characteristics of risk
 Understand how different funds can work alongside a risk
assessment process
 Understand the post R-day development of adviser models
 Understand why volatility is not a proxy for risk
 Understand how to select tactics to support your strategy
 Understand how to add value to your investment client
relationships
 Understand how Prudential’s fund range works in
conjunction with the Verbatim Investment process
Important information
This presentation contains some forward thinking statements which should not be taken as
fact. Information given is based on our current understanding, as at May 2014, of current
taxation, legislation and HMRC practice, all of which are liable to change.
No reproduction, copy, transmission or amendment of this presentation maybe made
without the written permission from Prudential.
“Prudential" is a trading name of The Prudential Assurance Company Limited, of
Prudential Annuities Limited and of Prudential Retirement Income Limited. This name is
also used by other companies within the Prudential Group, which between them provide a
range of financial products including life assurance, pensions, savings and investment
products. The Prudential Assurance Company Limited and Prudential Annuities Limited
are registered in England and Wales. Registered Office at Laurence Pountney Hill,
London, EC4R 0HH. Registered numbers 15454 and 2554213 respectively. Prudential
Retirement Income Limited is registered in Scotland. Registered Office at Craigforth,
Stirling FK9 4UE. Registered number SCO47842.
Authorised and regulated by the Financial Conduct Authority.