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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.