Portfolio Construction Guide

Many existing post-retirement portfolio construction approaches are either not clearly aligned to retirees’ objectives, or based on poor analysis, with little understanding of the possible outcomes for investors adopting these strategies.

Lonsec's guide to portfolio construction provides a practical framework to assist financial advisers in building an objectives-based retirement portfolio.

As discussed in Lonsec's initial white paper - Boomers, Herding, Denial and Zeitgeist - most existing post-retirement portfolio construction approaches attempt to provide a ‘one size fits all’ approach, which are either not clearly aligned to retiree investment objectives, or are based on inadequate analysis. Add to this the limited guidance and tools available to financial advisers, it is difficult to accurately determine whether a client’s investments are on target to achieve their goals in retirement.

A key challenge is that the majority of portfolio construction approaches to retirement still rely solely on risk profiling as the primary mechanism to determine the ‘optimal’ portfolio to meet an individual’s multiple investment objectives in retirement. Add to that, many investment decisions have been product driven, rather than strategy driven.

The Future of Financial Advice (FOFA) reforms require advice businesses to articulate their value proposition to clients; Lonsec believes this will require a greater focus on investment strategy, with product selection simply being a vehicle to execute a strategy, rather than being the driver of the strategy.

Lonsec believes that an objectives-based approach can enhance and complement existing approaches to retirement portfolio construction in the following areas:

Expectations management

Better communicate and manage client investment expectations, including the level of risk required to achieve those objectives

Alignment of strategy & objectives

Strategies are specifically tailored to individual client objectives, recognising that each client will have different retirement objectives and prioritise those objectives differently

Alignment of product to strategy

Product selection is a result of the investment strategy; it does not drive the strategy. Lonsec believes that this is particularly relevant given ASIC’s focus on product selection driven by clients’ ‘best interests’

Engagement

Improves financial adviser-client engagement by focusing discussion on investment strategy and how it relates to client investment objectives, rather than focusing on returns, markets and products.