With financial advisors under growing pressure to disclose and justify their fees under Phase 2 of the client relationship model, a new online tool that assists in the construction of customized, risk-controlled portfolios for clients may enhance your value proposition.
The Horizons Model Portfolio Program, offered by Horizons ETFs Management (Canada) Inc. and developed by PUR Investing Inc., both of Toronto, is aimed specifically at advisors.
The free tool generates individually tailored portfolios of exchange-traded funds (ETFs) based on a client’s risk preferences, risk tolerance and “know your client” requirements.
Each portfolio is assigned a risk number and, as market conditions change, the asset mix is adjusted quarterly to maintain that risk number at a constant level.
“When we see volatility increasing and the risk going up in any asset class,” says Howard Atkinson, CEO of Horizons ETFs, “we can take the additional risk off the portfolio and readjust it to meet the client’s original risk tolerance.”
This risk number corresponds to the estimated maximum potential drop in value the portfolio is exposed to during a one-year period. For example, a portfolio with a risk number of 10 would be expected to lose no more than 10% in any 12-month period.
“Risk” in this program is equated to volatility, and the tool will automatically “de-risk” portfolios when markets become dangerous, typically by moving away from long-term assets such as equities and increasing exposure to bonds, short-term securities or cash.
Conversely, when risk or volatility calms down, portfolios will increase their exposure to equities and reduce both cash and bonds. The program also measures risk in the fixed-income market, and will move along the spectrum between short- and long-term fixed-income securities as market conditions change.
The model portfolios also can include a measure of ETFs that offer exposure to commodities and alternative investments.
“One of the benefits of the program,” says Yves Rebetez, managing director of ETF Insight Inc. in Toronto, “is that it can bring into the equation an up-to-date assessment of risk, which gives advisors an additional tool in building suitable portfolios for clients and achieving the desired outcomes.”
Maintaining a constant level of risk, Atkinson says, is a core component of pension plans, which are managed with a view to their future payout obligations. The growing choice of ETFs, with the access they provide to a variety of asset classes and easy liquidity, allows individuals to access similar risk-management strategies.
The program uses Horizons ETFs to fulfil the requirements in the various asset classes, but you may substitute ETFs or mutual funds from other providers or even individual securities.
Mark Yamada, president and CEO of PUR and an expert in institutional risk strategies, says volatility is measurable and more predictable than performance. Historically, he explains, as volatility increases, markets become more vulnerable to bigger declines.
“I look at portfolio risk as being similar to bathwater temperature,” Yamada says. “Some people like it hot; some like it a bit cooler. You know if it feels comfortable when you sit in it, and can adjust it by adding more hot or cold water.”IE
© 2014 Investment Executive. All rights reserved.