Advisers have always had to deal with scrutiny, whether from their clients or, perhaps more likely, their regulators. 

    This environment is unlikely to change and, if anything, is set to increase.   

    With a chain only as strong as its weakest link, robustness and rigour must be evident at every aspect of an adviser’s process.

    This includes your approach to building investment portfolios, to make sure it can stand up to scrutiny both now and in the future.

    Defining rigour

    One definition of rigour is 'the quality of being extremely thorough and careful'.  

    To give a bit more investment context, rigour is also defined in the paper Lessons for Asset Owners by Gordon L Clark of Oxford University and Roger Urwin of Willis Towers Watson. 

    The paper focuses on a number of rigour related attributes that successful asset owners exhibit, and which have led to positive outcomes for their stakeholders. 

    The diagram below summarises the core attributes, which are interrelated, with good governance embedded throughout the process. 

    Investment rigour

    Let's look at each of these in turn. 

    Mission clarity

    In its simplest form, this can be addressed by asking ourselves what does success look like, and how are we going to get there? 

    However, it's not quite as simple as that.  

    There are various factors that need to be taken into account to evaluate success accurately.  

    These include the client's overarching goals, the time periods considered and the impact of fees, as well as other factors such as a client's beliefs around environment, social and governance investing.  

    Successful asset owners have clarity on all these measures and are able to monitor their progress relative to them effectively.

    The need for mission clarity on investment portfolios is particularly important for advisers, as it enables you to better understand how your chosen investment portfolios fit with both your advice process and your clients’ needs.

    It also means you can clearly articulate how portfolios and advice align to regulatory requirements, and in particular the product governance or PROD rules. 

    Strategic focus

    We've talked before about the importance of investment strategy (which we define as being the split between different types of assets), and how academic studies suggest around 90 per cent of a portfolio’s return variability can be defined by the choice of investment strategy. 

    The four important inputs into a successful strategic asset allocation process are:

    1) Alignment with the target objective, constraints and time horizon

    For example, if a client has a focus on making regular withdrawals then a strategy setting process which factors in sequencing risk is potentially more appropriate.

    2) Assumptions are all based on evidence

    Any assumptions baked into the process should be based on a reliable, trusted and appropriately sized dataset. These assumptions should also be aligned with the expected fees and route of implementation.  

    3) Sensible diversification

    Combining different asset classes, regions and sectors offers the scope to reduce risk but not return.

    However, linked to the previous point, the decision to combine them must be based on evidence, factor in costs and be transparent and easily explained to clients.

    4) Scenario testing

    Financial markets can be volatile, and returns will vary from year to year.

    All potential strategies should be tested across a range of potential economic scenarios to identify the most robust, given the portfolio’s stated objective.

    These aspects are all fundamental to achieving a successful and repeatable process to setting an investment strategy.

    Implement effectively and efficiently 

    Once a strategic asset allocation has been set, the next stage, as set out by Clark and Urwin, is to implement it both effectively and efficiently. 

    Several areas need to be considered, including the right combination of active, factor and index-tracking management and appointing the managers to run the mandates. 

    Irrespective of the chosen route, an understanding of all associated fund costs and expenses is needed, and it may be worth negotiating to achieve competitive terms for your clients.

    Good governance

    Keith Ambachtsheer, one of the leading voices in investment governance, suggests good governance can add between 1 and 2 per cent in additional returns per year. 

    (You read more about good governance and building a strong investment process here)

    In a nutshell, good governance can be described as:

    "Doing the right things, in the right order and having a willingness to reflect, learn and evolve."  

    It's worth emphasising that last part - a willingness to reflect, learn and evolve. This is especially important as client and regulatory needs develop, and as market conditions and products change over time. 

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