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PWH Financial Planning Ltd Investment Process

PWH Financial Planning Ltd Investment Process Summary of Process 1) Establish Risk and Objectives - Objective - Risk - Capacity for Loss 2) Asset Allocation 2.1) - Small Portfolios 2.2) - Bespoke Portfolios
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PWH Financial Planning Ltd Investment Process Summary of Process 1) Establish Risk and Objectives - Objective - Risk - Capacity for Loss 2) Asset Allocation 2.1) - Small Portfolios 2.2) - Bespoke Portfolios 3) Contract Selection 3.1) - Structured Products/Deposits 3.2) - VCTs/EISs/Offshore Investments etc 4) Investment Selection 4.1) - Criteria 4.2) - General Asset Allocation 4.3) - Model Portfolios 4.4) - Asset Allocation Review 4.5) - Investment Panel 5) Client Reviews/ Switches - System/Frequency Investment team - Jonathan Wade (Investment Director) - Scott Palmer (Ass. Technical Director) November 2015 1) Clarification of Objectives and Risk The investment process is one small but important part of the overall Adviser process. This document should therefore be read in conjunction with the PWHFP Adviser Process. Establishing clients objectives and attitude to risk is the first stage of any investment process and advice. Clients objectives and investment term are established through the fact-find meeting and recorded in our back office system Finplan. Attitude to investment risk is also discussed at client meetings. A more objective risk profile is obtained through the completion of a risk questionnaire. Having reviewed several alternatives, our chosen system is Skandia s Risk Questionnaire. The questions are relatively easily understood by clients and we have found the resulting risk score to be consistent with our own impression of clients attitude to risk. The Skandia risk questionnaire must be completed by clients in all cases and the results should be consistent with any subsequent investment recommendations. However, it is important that Advisers do not rely blindly on risk questionnaires; it is no substitute for know your client. Risk questionnaires can be confusing to some clients and a conversation with clients about investment risk must always be held. The results from this conversation should be consistent with the results from the risk questionnaire. If they are not, the adviser should establish the reason for the discrepancy and ensure he/she has a thorough understanding of the client s attitude to risk. In summary, Skandia s Risk Questionnaire is a useful scientific and objective way of analysing client attitudes to risk. However, it is only a tool and ultimately, it is advisers responsibility to correctly interpret clients attitude to risk and, as always, ensure suitability of any investments recommended. Risk questionnaires should not be relied upon in isolation. Risk Questionnaires are sent out annually as part of an automated system prior to client reviews. If these Risk Questionnaires are not completed and returned by the client, we should carry out the review and make clear that we have based the review on their existing established attitude to risk. Risk Questionnaires should continue to be sent prior to each review thereafter. 1.1) Capacity for Loss A client s capacity for loss must always be established; this is often more important than attitude to risk. If, for example, a client is highly dependent on his/her capital to provide a sustainable income, or if a capital sum is required in the near to mid-term, this overrides a client s attitude to risk, in that the client cannot afford to have significant risk to capital. It is very important, therefore, that capacity for loss is clarified at each fact find and before making any investment recommendation or investment change for clients. Advisers must judge whether clients genuinely have a capacity for loss and consider whether a client may be better advised to keep money on deposit or repay debts, for example. 2) Asset Allocation Having clarified clients attitude to risk, it is important that any investment selection meets clients objectives and attitude to risk as closely as possible. Sector descriptions such as balanced managed can be misleading as funds falling under this category can have very different asset allocation. PWH Financial Planning have a robust system for unravelling investment funds to ensure the underlying asset allocation of any fund fits with clients needs. Chapter 4 provides details of the criteria through which we ensure that investments are suitable for clients attitude to risk. It is important that Advisers follow the process as prescribed in this document. 2.1) Smaller Portfolios Smaller portfolios, as defined in the client proposition or those with total investments with PWH Financial Planning of less than 50,000, will normally be recommended an investment solution using asset allocator funds which automatically ensure an appropriate asset allocation is maintained for their risk-profile. There is some discretion here and the choice of contract depends on a number of other factors such as the likelihood of further future investment and individual client preferences and serviceagreements. Where funds are held in a Personal Pension Policy, Investment Bond, or a contract which does not offer our preferred asset allocator funds, we will use the closest alternative(s) available. There are a number of asset allocator funds available, which aim to provide an adaptive investment solution where asset allocation is tailored by a third party company to a clients attitude to risk. Having reviewed the market, we have chosen the following risk managed funds: - Prudential Dynamic Portfolios - Standard Life MyFolio - Aviva Multi-Asset These offer a wide range of funds covering all risk-profiles and a strategic, adaptable asset allocation. Specific research can be found in the PWH Financial Planning Research folder. At present, these risk-targeted portfolios do not have sufficient track records to choose one over another. However, they all fundamentally work in the same way to ensure the underlying asset allocation remains appropriate for a client s risk profile whilst allowing regular active changes to asset allocation by the manager to take advantage of macro opportunities. It is also possible to use Royal London Governed Portfolios and Prudential Prufund where applicable although these are specific to the provider s contracts. More specifically the Prufund should only be used when the client s attitude to risk dictate it. Based on the Skandia Risk Profiler, these will ensure that clients have an appropriate asset allocation from a portfolio made up of diversified multi-asset collective investments. Contract and fund charges are competitive with bespoke collectives and these risk-targeted funds have the advantage of always conforming to clients attitude to risk and reducing part of our normal advice and review processes, which is consistent with the D service proposition to which these investments apply. For advisory clients, or those where over 50,000 is invested, asset allocator funds may also be used as our core holdings (see section 6.4), with other sector-specific satellite funds built around to give greater diversification. 2.2) Bespoke Investment Selection For advisory clients with larger portfolios, there is more discretion to recommend individual sector-specific funds although these must always together constitute a portfolio of appropriate diversity and risk for the client. This is our preferred core and satellite investment strategy which involves incorporating multi-asset funds, including asset allocator funds, as core holdings, where they have the flexibility to alter the exposure to certain assets in response to constantly changing market conditions. Single-asset funds are then used as satellite holdings to allow diversity and exposure to more specific areas, and also to allow an element of control on the overall asset allocation. The aim of this approach is that the volatility of your portfolio will be reduced, whilst also attempting to protect the value of investments at times when markets are in decline. The core holdings have the ability to increase or decrease exposure to riskier assets, such as equities, depending on their managers views of future market movements. This bespoke investment selection is always done in conjunction with client risk profiles and our asset allocation review see section 6.3. Each quarter, the PWH Financial Planning investment team meet to consider the prospects for the global economy and investment markets and, in turn, list the relative prospects for individual sectors. These are ranked as short, neutral or long depending on their perceived attractiveness see section 6.3. These rankings are used in selecting satellite funds. All clients apart from those with the most aggressive portfolios (risk level 8 and higher) will have a substantial part (typically 50 to 60%) of their portfolio in our chosen core funds but there is scope for larger portfolios to have a wider range of satellite funds. The panel (see section 6.4.) lists the main satellite funds which we use. There may occasionally be circumstances where a client requires or requests an investment not on our panel for example a sector/market specific investment in which case we can consider these requirements on a case by case basis. Advisers should speak to Jonathan Wade or Scott Palmer in these situations. 3) Contract Selection It is difficult to be completely prescriptive with regard to contract/policy selection as there are a multitude of different contract and policy types and there are often specific reasons for using various types of contract e.g. pensions, protected investments, trust investments etc which preclude a one size fits all policy. Having reviewed the main wrap platforms, our preferred platforms are currently: A J Bell s InvestCentre, Old Mutual Investment Solutions Aviva Wrap. Our research takes into account the financial strength of the provider, contract charges, investment s initial and annual charges and the features offered by the respective platforms, such as investment phasing, income flexibility, rebalancing, regular withdrawal facilities etc. Please see the Research folder on our server for further details of contract research. These platforms all have their own strengths and weaknesses and it should be noted that no single platform or contract is currently suitable for all clients or situations. The Technical department will ensure that each recommendation will assess the pros and cons of different contracts based on the client s individual circumstances and ensure the most suitable contract is recommended. For most mainstream investment business, we should use the above three platforms. Investment Bonds and some pension business will clearly necessitate other contracts, which are as follows: Pensions Aviva Wrap (as above) Royal London PPP LV Flexible Transition Account Prudential PPP Old Mutual PPP Standard Life PPP Investment Bonds Old Mutual Aviva (Guaranteed + other funds) Prudential (Pru-fund + other funds) LV (WP and G teed) These contracts have been researched in depth and offer a range of options in terms of investment choice, charges and functionality which will allow the right pension or investment contract to be chosen for most clients. Where an adviser believes there is justification for using a platform, contract or policy other than those above, this should be referred to the Technical department so that the appropriate research and due diligence can be carried out prior to any recommendation being made. 3.1) Structured Products/Deposits Due to the constantly changing nature of the structured product/deposit market place it is not possible to publish a preferred panel of providers and products. Instead, the market will be reviewed on a case by case basis to ensure each client receives best advice for the most suitable investment possible. Structured products will only be recommended under limited circumstances, and will be viewed first and foremost as equity investments (assuming an underlying equity index) rather than protected investments. Depending on the product s terms, they can add attractive growth potential to a portfolio as well as an element of risk protection. Structured deposits can be used more widely and can be a valuable way of obtaining higher returns than from cash without excessive risk. However, as with structured products, it is essential that investment term and counterparty risk are considered carefully before recommending a structured deposit. Recommendations for structured products and deposits can be made by our Technical Department only. 3.2) VCTs/EISs/Offshore Investments etc There may be circumstances where it is in our clients best interests to advise on the above. It may be necessary to check our regulatory capacity and P.I. position before committing to these types of investments. Recommendations for VCTs, EISs and Offshore Investments etc should be made by our Technical Department only. 4) Investment Selection PWH Financial Planning s investment process dictates that unless a client specifically requests an alternative strategy, we should implement our preferred core and satellite investment strategy. The funds which PWH Financial Planning will utilise in this strategy form an investment panel which is reviewed and updated quarterly by the investment team see section 6.4. Only the investment team can select investments to be recommended to PWH Financial Planning s clients. The panel covers the major geographical investment markets and asset classes. However, there will be occasions where there is a reason to recommend an investment not included on the panel, for example a country specific fund or alternative asset fund. Where this is the case, the proposed investment or enquiry should be made to the investment team, who will research and select an appropriate investment. Where a new client is appointed who has an existing portfolio, we recognise that this portfolio cannot always be immediately restructured in its entirety to fit with our investment process, for reasons of cost and clients preferences. In these cases, the technical team will look to advise the progressive restructuring the portfolio at client reviews until it fits with our core and satellite investment model. 4.1) Criteria for Investment Selection and Research Funds are selected based on the attaining a rating from at least one of the following rating agencies: Square Mile Square Mile are a relatively new ratings agency set up by ex-employees of Morningstar OBSR. Their research is qualitative, looking at the management of a fund and the processes they operate. Their research is focused on the investor outcomes of income, capital accumulation, capital preservation and inflation protection. Morningstar OBSR Morningstar OBSR are one of the most respected external research agencies with one of the largest and most experienced fund research teams in the UK market. They employ a team of analysts who seek to understand fund managers and their funds by focusing on group ownership and stability, resources, investment philosophy, investment objectives, investment process, portfolio construction and risk controls together with regular reviews. Any rating that emerges is based on the analysts convictions in a fund s ability to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over the long term. Rayner Spencer Mills (RSM) This is a Rated Fund Service providing an independent badge of quality to help select funds. This allows funds which have reached the required standard to attain a rating to be identified easily and quickly. Funds are assessed using a rigorous and robust process involving qualitative and quantitative research. Quantitative measures centre on performance and risk with a number of measures used in each area to provide a comprehensive picture. Qualitative assessment gives some idea of how the fund will perform in the future. The purpose of the analysis is to ensure that the fund has robust fund management processes in place, a strong fund management team and also to allow a more detailed view of how the fund actually operates. Funds that are rated are those which are believed to be the best in their sector. They will have different methods of investing and different style and cap biases but all have produced good performance backed up by a defined and understandable process. Citywire Citywire is the only firm to exclusively rate fund managers, not funds. This is because they believe the most important consideration when selecting an actively managed fund is the track record of the manager running the money, providing a different perspective on how to select funds. Fund managers move about frequently and so experienced and talented fund managers may launch new funds which would not necessarily be able to receive ratings from either Morningstar OBSR or Rayner Spencer Mills as they has not been in force for a long enough period of time. If the manager already has a Citywire rating it can provide a good indication that the fund will perform well as the people behind it have the necessary expertise. Behind the Ratings is a sophisticated methodology approved by AKG, an independent actuary. It's entirely numbers-driven and therefore impartial. It is not a 'pay to play' system', so there's no incentive for Citywire to rate one fund over another. Trustnet Alpha Manager(FE) FE Alpha Manager ratings identify the most talented fund managers operating in the UK today. The methodology examines the performance of individual fund managers over the course of their career, focusing on consistency, stock-picking skill and their ability to generate performance in rising and falling markets. This is an important rating as fund managers often change companies and their track record is one of the most important considerations when researching investment funds. In House Research The PWH Financial Planning investment team conduct in-house research. Fund asset allocation is monitored to ensure they remain consistent with clients asset allocation models and risk profiles. Movement of investment managers between companies is monitored carefully as this can have a major bearing on whether funds are included in the panel. The investment team are aware of any changes within the investment market through on-line and postal subscriptions to Citywire and Fund Strategy. In house research includes printing factsheets for all panel funds and reviewing them for the relevant ratings, relative performance, asset allocation and manager changes each quarter. These are also saved for further reference. All these factors are taken into account at the quarterly investment meeting and changes to the fund panel are made at that time. Exceptions can occasionally be made for funds that have not received, or are not eligible, for a rating at the discretion of the investment team, if they believe that the fund can provide value to the appropriate clients. 4.2) General Asset Allocation The table below gives an indication of the overall asset allocations we generally consider to be suitable for clients with risk profiles of between 3 and 8. These are only an indication and due to PWH Financial Planning s core and satellite investment strategy, where the core funds make key asset allocation decisions, there can be fluctuations in clients asset allocation from year to year within a 5% margin either way. Asset Class Risk Level Equities 30% 40% 50% 60% 70% 80% Including UK, US, Europe, Asia, Emerging Markets & Global Specialist Non-Equities 70% 60% 50% 40% 30% 20% Including Cash, Corporate Bonds, Government Bonds, Property & Other Assets Checks are also made with various sources to see whether these splits are still appropriate, and these include: SEI Strategic Portfolios Morningstar OBSR Prudential Dynamic Portfolio Funds Standard Life MyFolio Market Funds Skandia Standard Asset Allocations ISA, CIA, Pension & Bond 4.3) PWH Financial Planning Ltd Model Portfolios May 2015 The following are typical model portfolios suitable for clients with risk-profiles between 3 and 8 i.e. the majority of clients. These portfolios
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