The balance with complex products in a portfolio
Advisers have said they would be unlikely to impose blanket bans on complex products in portfolios but that making large allocations could affect their professional indemnity insurance.
In a roundtable with BT, advisers said complex products could be included in portfolios if they were suitable for clients but it was important to understand their structure and how they fit in a portfolio first.
Michael Strachan, chief executive of Corinella Capital Partners, said: “It is important to understand how the product works and how it fits. We wouldn’t do a blanket exclusion, it all depends on how it fits in a portfolio”.
Marnie McLaren, head of investment research and governance-specialist businesses at BT, said: “We don’t make blanket calls but what’s critical for complex alternative products is the liquidity and how they are structured.
“Last year the market shocks were short and sharp but you have to understand the ramification of what you are invested in and how they perform in those environments. You have to also make sure the redemption details are clearly outlined as this is something people only find out when the market goes down.”
Other factors considered by McLaren were the appropriateness of a structure, the performance and the skill of the team.
Strachan said the need to understand a product was so crucial that he would dismiss funds if they failed to disclose underlying holdings.
“If a manager is not prepared to disclose their holdings, then how can you be happy with what you are invested in? If it is a complex product like a derivative then you don’t know where the risk is. I have an issue with this, if they don’t want to show their full holdings then there are plenty of other managers out there,” Strachan said.
Asked if the inclusion of complex products would have any ramification on professional indemnity (PI) insurance, Brian Pollock, national manager for corporate governance at BT, said there would be unlikely to be an effect for a small allocation but there could be an impact for larger weightings.
He added if an advisory firm saw a PI increase of larger than 10%, this could be due to the firm taking undue risks in their portfolio.
AUTHOR
Laura Dew
Recommended for you
ASIC has released the results of its first adviser exam to be held in 2025, with 241 candidates attempting the test.
Quarterly Wealth Data analysis has uncovered positive improvements in financial adviser numbers compared with losses in the prior corresponding period.
Holding portfolios that are too complex or personalised can be a detractor for acquirers of financial advice firms as they require too much effort to maintain post-acquisition.
As the financial advice profession continues to wait on further DBFO legislation, industry commentators have encouraged advisers to act now in driving practice efficiency.
