Investments and Savings

At Clear Financial Advice Limited, we have extensive knowledge and experience in formulating successful investment and savings strategies.

For investments, we take you through a structured process to determine which approach is right for you.

Stage 1: Establishing the clients goals and expectations

Any financial planning and recommendations we undertake needs to fit in with your overall financial and life goals. These investment objectives should set out the needs and purpose of the investment for example whether the investment is for income or capital growth. The timescale for these needs will determine the length of time the client wants to hold the investment. Time is also a critical factor in the risk assessment process and it is vital that you make a decision on when you will need the returns on investments. A person with a long time before they retire may choose to take on higher risk investments, at least in the early years as the impact will be less and there will be longer for any falls to recover.

In addition it is essential your preference for risk is established and particular the amount of loss that can be tolerated.

Therefore the three key elements to the assessment of understanding of risk is as follows:

1. Knowledge and experience of risk – when gathering information about clients we will document as part of our fact finding process the level of experience and knowledge they have of various types on investment.

2. Attitude to risk – Core to the overall investment process is the need to ensure the attitude to risk is defined, understood and accepted by all parties and that all investment decisions are made taking into consideration the said defined risk level. It is also important to note that some clients have a range of risk profiles depending on the level or source of funds.

3. Capacity for loss – This refers to the amount of loss a client not only is prepared to accept when making an investment decision but also their ability to absorb the loss and whether any loss of capital will have a detrimental effect on the clients standard of living.

Closely related to the issue of risk is any need to hold some liquid cash or “rainy day” reserves to meet any emergencies or short term needs.

To assess the understanding of risk and determine the level we use a series off psychometric questions. The risk profiling questionnaire that we use has been developed by Skandia in association with Towers Watson, a leading actuarial consultancy firm, in line with the best industry practice and the guidelines laid down by our regulatory body, the Financial Conduct Authority. Each answer you provide to the series of questions produces a score and these are then aggregated to calculate a “risk profile” from 1 (low risk) to 10 (high risk).This gives us a starting point for a conversation about risk and establishes a client’s emotions concerning risk. The results of the questionnaire provides an illustrative asset allocation which we will discuss in more detail.

Stage 2: Asset Allocation

The purpose of the asset allocation process is to create portfolios that should behave in line with your expectations. By matching implied volatility with the attitude to risk the asset allocations aim to minimise the chances of downside risk that are greater than you are prepared to tolerate. As previously mentioned the results of the questionnaire produce a suggested illustration. This allocation is not set by any one individual of organisation but by a mathematical theory known as Modern Portfolio Theory (MPT). The theory is that for every level of risk it is possible to construct an investment portfolio that, mathematically,delivers the maximum expected investment return. Clearly, different portfolios will generate different levels of return and expose an investor to different levels of risk. A fundamental principle of MPT is that the risk of the portfolio should be considered as a whole, and not individual assets in isolation. While individual assets do have a bearing on the overall level of risk the investor is exposed to, the correlation between the assets in the portfolio has an even greater bearing.

One key way to offset risk is diversification to avoid putting all your eggs in one basket. Some of the risks of investing in equities can be reduced by diversifying into a range of different shares, sectors and markets. Equally diversification into different asset classes such as UK equities, global equities, corporate bonds, fixed interest bonds etc.

Stage 3: Understanding their Status

For example choosing their tax vehicle. Any investment strategy will involve understanding many of the objective factors about clients, such as their tax position, the size of their portfolio and the extent to which they have built up investments in pensions and ISA’s etc.

Stage 4: Product Provider

As we are fully independent we are able to approach any product provider on the market which is something that we feel very strongly about to be able to offer our clients the best possible products. We continually research the market to know the best products and providers.

Stage 5: Fund Selection

For portfolios in excess of £400,000 we do not use model portfolios. All portfolios are tailored individually and are not classed in groups in accordance with their risk profile. We can use discretionary fund managers but we don’t as we believe they do not add value. We do have an investment panel and funds accepted onto this panel must meet specific criteria. We do look at performance of a fund however the past cannot be relied on in isolation as an accurate guide to the future. The characteristics and therefore value of markets and assets can change due to unpredictable events which is effectively the essence of risk.

As well as performance we closely monitor the volatility of funds which is a measure of how much your investment rises and falls in value over time. Investments that are more volatile will rise and fall to a greater degree than those that are less volatile.

Stage 6: Monitoring

We have an investment panel and use certain criteria, which is detailed below to select funds onto our panel. The funds are continually monitored and the investment panel is published quarterly.

We also assess the people that are responsible for managing the individual funds. Citywire ranks fund managers according to their individual track record, rather than simply the performance of the fund they currently run. The fund managers are compared against peers in how well or badly they have performed and a league table is produced.

The investment process is a continual cycle as we will continue to meet with you and review your goals taking us back to Stage 1 in the process and your aims and priorities will change over time.

The value of investments can fall as well as rise. You may not get back what you invest.