Investment Research Expert Witness Ltd
The Investment Research Partnership
Do you review your trust and pension portfolios regularly?
When is enough, enough? This is a question I have been asked many times but can give no clear answer. My usual answer is ‘It depends on....’
It depends on a number of key factors. If I am to prioritise them it would be:-
1) Risk profile of the client
2) Investment time horizon
3) Investment objective
However, which is more is important will be case dependant.
For example, a private portfolio or trust, which is for the benefit of a single retired person dependant on the income from the portfolio, would see risk to both capital and income as critical factors, whereas a person not retired, and not requiring income, would only be concerned with capital values, and less concerned if the income from them reduced.
Likewise in pension schemes, age is often the critical factor. Lower aged persons in the scheme, many years from retiring, will not be so concerned if the fund value decreased significantly but someone who is but a few years away from retiring would be. If the majority of the members are closer to retirement age than the remaining members, then the investment balance/strategy must reflect the capital risk, both to the scheme members and the likely income in the near future.
You will see how, in two short paragraphs, risk has been impacted by the age of the investor/beneficiary, the investment time horizon and whether it concerns capital growth, income or both. And we have yet to discuss investment risk.
So to make yourself compliant what must you do and when should you do it?
The governing rules in this respect are vague for both private portfolios and trust portfolios, but are set down in guidance notes for pension schemes (excluding private pensions).
A suggested rule of thumb would be:-
However, if the portfolio is due a change of some description, such as a large lump sum payment to the beneficiary/owner or the objective is changing from capital growth to capital growth and income or totally income, then that review should become more frequent.
Some changes will be impacted without warning, such as the death or serious illness of a beneficiary or owner, in which case, if the annual review has regularly taken place, you are never more than 12 months out of line. But if the review is less frequent, and options have not been regularly reviewed, the potential for holding the wrong risk profile for the portfolio increases dramatically. It is in these scenarios that the risk of being sued by the owner or the owner/remaindermen is very high. This is where the liability risk to your company and your personal reputation is at its highest.
The impacts can come from all directions. Higher PI costs, reviews by your authoritative governing body, personal reviews, client file inspections, the list goes on.
However, there are numerous ways to overcome the issues raised here.
1) Review your internal processes and set out your review plan,
2) Target the most vulnerable clients and set about reviewing without delay,
3) Bring in third party advisers to assist with the prioritisation and/or reviews,
4) Devise and follow through a structured plan to bring all clients up to date and then set down the annual review date and don’t forget to allocate a member of staff to carry out that review,
5) Once in place and operational, tell your PI insurers. It could reduce your premiums if they see that liabilities are controlled.