Financial advisers need to make a firmer distinction between risk averse and return-seeking clients when safe havens like bonds are providing such low yields, a panel has heard at the 2019 Professional Planner Researcher Forum in Sydney.
With the ten-year bond rate at roughly one per cent in Australia, Brad Matthews from Brad Matthews Investment Strategies said there was now a “hard line” between the goals of capital protection and achieving returns.
“Previously risk profiling had a spectrum from conservative through to high growth, and for a lot of clients who are conservative in nature they could still meet a return objective by being in a conservative portfolio,” Matthews said. “Today I think that’s less the case because we have no real rate of return on conservative investments given where interest rates are at.”
Matthews was speaking on a panel with Sunsuper head of asset allocation Andrew Fisher and independent investment strategist Giselle Roux. The session, which opened the forum, was chaired by BlackRock head of portfolio manager, analysis and solutions, James Kingston.
“Whereas in the past you would expect three, four or five per cent out of a very low risk portfolio, we don’t have that luxury today,” Matthews continued. “Clients who don’t want to take any risk at all are probably not going to get a return out of that portfolio.”
The change in dynamics for low-risk asset classes could force advisers to have updated discussions with their clients around their risk profile, Matthews said.
“There are real conversations advisers need to have that they potentially didn’t need to have before,’ he said. “If wealth protection is your primary objective you largely need to sacrifice wealth creation, and for some other clients the adviser will need to play a role because they actually need to take risk in order to meet their objectives and build wealth over time. I think that’s a slight change in the risk profiling process.”
Even if domestic equities holdings had no capital growth or dividends, Matthews pointed out, the franking credits would still constitute more of a return than bond yields. “That fundamentally changes the relationship between risky assets and risk-free assets, which should flow through to changing the strategic asset allocation,” he added.
Sunsuper’s Fisher noted that not every asset is as risky as equities or as safe as bonds, with mid-risk assets a critical consideration for client portfolios.
“I agree with Andrew’s point,” Matthews said. “It does increase the importance of things like alternative assets that can give you somewhat of a defensive profile without taking additional risk, [and] I think they can play a bigger role in portfolios going forward.”