Good research can be the difference between financial hardship and comfort in retirement

Adapting in response to adversity is the great Darwinian principle for survival, which argues that it is not the strongest or the most intelligent, nor even the most specialised that thrive in the long term, it is the most adaptable. 

The ability to reflect fully on the truth of this axiom is only really possible when survival has been threatened, as it has for many of us during the coronavirus pandemic, whether at the level of society, home or work.

It is easier to adapt if you are flexible, and flexibility implies balance and the ability to test and challenge. Creating a ‘culture of challenge’ was highlighted as the basis of good research in the seminal FCA Thematic Review paper TR16/1 ’Assessing suitability: research and due diligence of products and services’. The paper identified good research as an ongoing process, constantly curious and constantly testing. Poor research was also identified as the principle cause of ‘poor advice outcomes’, no less.

How right they are. As the UK moves away from the coronavirus peak, it is clear that testing is emerging as one of the most potent weapons in the fight to alleviate lock-down conditions. At the time of writing and prior to mass testing, we are flying relatively ‘blind’ and unable to adapt to conditions effectively as a result. There is an analogy to be drawn between the critical role that testing assumes in these difficult times, and the role of research in investment advice. Good research is critical to advisers, who understand the reliance clients have on them to navigate towards successful outcomes as part of the financial planning process, in all types of inclement weather.

The role of Synaptic is to produce data and applications to perform investment platform, product, portfolio and fund research - including accurate costs and charges analysis, risk profiling - making compliance possible, but more importantly, enabling advisers to exercise their expertise in their role of custodians of their clients’ life savings. Research can make the difference between hardship in old age and a comfortable retirement. It really is that stark. All over the country retirees are quietly benefitting from the measured effectiveness of their advisers’ planning. 

With such high stakes, it is obvious why there is little room for failure. Risk is the currency of the professional adviser, and mastering risk is the core competency of investment advice. The regulator has evolved an approach to risk that requires a customer’s ‘need to take’ risk (to acquire growth and beat inflation) to be balanced with their appetite for risk and ability to bear loss.

This means that if a client experiences changes to their portfolios that they are not prepared for, do not understand, or result in losses they cannot afford, the adviser would be at fault. The models provided by Moody’s for risk management, employed by Synaptic customers, have provided a framework for the advice, predicting accurately the range of performance and potential losses of portfolios, ensuring that clients are not over-exposed to losses nor overly surprised by any volatility experienced by their portfolios.

The downturn of 2008 (also referred to in the industry as the Great Financial Crisis) and currently, the experience of the coronavirus pandemic (as yet unresolved) prove that circumstances can and do change with dizzying speed, but in the spirit of the FCA’s on-going challenge and re-evaluation, advisers and customers relying on good research and processes are flying with full visibility and adapting to potentially catastrophic conditions to survive and thrive another day. The latter reflecting portfolios with well-constructed asset allocations and re-balanced correctly.

There can be no room for undue speculation. The principles of diversification and the long-term asset allocation strategies available to advisers ensure that investment success is mathematically as certain as is possible, assuming the markets are able to pursue their wealth creation function. Justin Urquhart -Stewart used to remark that clients liked to ‘gamble’ on the periphery of their wealth or assets, but on the proviso that there is no room for gambling in a portfolio if it intended to support a client’s financial objective. Investment relies on term, or investment ‘horizon’ to ensure that what certainty exists in the markets can be harnessed constructively – staying clear of speculation. It is why we use probability-based projections to identify all viable outcomes, including the most far-fetched. It is also why our risk models, in line with all good research, are constantly updated and reviewed, so that your investment can be managed effectively. It is also why projections support the formulation of strategies designed to survive the coldest investment winters and create the right kind of reliance on markets to deliver results.

The coronavirus pandemic has caused our customers and their clients concern about market and portfolio losses:

The principle areas of concern:

1. Ability to monitor the markets
2. Ability to monitor clients’ portfolios
3. Ability to put a risk framework around portfolio movements that would:
   1. Put losses into perspective
   2. Explain short and longer term prospects
   3. Indicate whether short term interventions were required
   4. Manage asset allocation strategy in short and longer term horizons (rebalancing)
   5. Answer the question ‘how worried should you be’?

What Synaptic Research offers:

1. Ability to access timely data relating to client investments
2. Ability to construct, test and rebalance notional portfolios
3. Provide analysis via the Moody’s risk framework to understand loss, future growth and asset allocation

What the coronavirus pandemic has reinforced:

1. Importance of research to anticipate investment performance and reassure clients
2. Importance of communicating with clients, including tables and charts to demonstrate risk and return
3. Importance of an investment strategy that is asset allocation and term based
4.  Importance of adhering to an academically sound risk management model, combining:
   1. The need to take risk
   2. Capacity for Loss
   3. Attitude to Risk.
5. Importance of quantifying losses expected within competing strategies, underlying the decisions of all advisers to correctly pitch risk to their clients. No client should be in a strategy that presents them with surprise, horror or sleepless nights.

If you would like to learn more about our financial research solutions, please get in touch.