Why rigour is important to investment

A chain is only ever as strong as its weakest link. That means Financial Advisers need to ensure rigour is applied to every part of their investment process so that it can stand up to scrutiny from clients and the regulator. It’s no different here at Hymans Robertson, where we talk a lot about this institutional rigour around the firm. But – as with any term we use daily at work – sometimes it’s incredibly useful to take a step back and think ‘what do we actually mean when we talk about rigour?’. Here are my thoughts.

Rigour starts with clear goals

What does “good” look like?  This needs to be identified so Investors can have a sense of what they are working towards. There are lots of things that might feed into this decision, e.g. fee levels, time horizon, approach to responsible investment.  The important thing to remember is that investment arrangements are tailored to be aligned to these goals.

There are other benefits to creating shared goals. It really helps advisers understand how their investment portfolios fit with the advice process and clients’ needs, as well as helping articulate how your advice met that need and the regulatory requirements.

So what’s the strategy?

Four important inputs to a successful strategy are:

• Aligned to your clients' needs

For example, if a client wants to make regular withdrawals, your strategy should consider the impact of sequencing risk.

• Evidence based assumptions

Assumptions should be based on a reliable, trusted and appropriately sized dataset, in line with expected fees and implementation.

• Sensible diversification

Combining different asset classes can reduce risk but won’t necessarily increase returns. Diversify based on evidence, factor in costs, and clarify the benefits for investors.

• Test and reflect

Of course, returns will vary from year to year. That’s life. Be sure to test your strategy across different economic scenarios to make sure it meets the investment goals you have set out.

Implement effectively and efficiently

If strategy is the “what”, don’t neglect the ‘how’. Think about the right combination of active, factor and index-tracking management. Appoint the right managers and be clear about costs – don’t be afraid to negotiate better terms for your clients either.

Govern well

Keith Ambachtsheer says that good governance can add 1% - 2% in additional returns per annum. This just highlights that it’s always worth thinking about good governance: doing the right things, in the right order, and have a willingness to reflect, learn and evolve.