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THE J.S.P. FINANCIAL SERVICES LIMITED             

INVESTMENT ADVICE PROCESS


INTRODUCTION

We are a firm of Independent Financial Advisers established in 1991.

Our customers are central to our business so we try to tailor our advice and service to meet your needs, acknowledging that each of our customers are different and their financial needs and priorities change with time.

This document sets out how we go about assessing your needs and the investment strategies we then employ to try to meet those needs.

OUR ADVICE PROCESS

Deciding how best to invest your money can be daunting. There are so many options and so many uncertainties – how do you choose what’s right for you?

We try to eliminate as much of that uncertainty as possible by working with you to identify the most appropriate way to achieve your financial goals.

The JSP advice process is designed with that in mind – it creates a framework for us to discuss your needs and expectations, to assess and agree your attitude to risk and then to build and manage an investment portfolio to match.

By working through a series of logical steps, you will be able to gain a better understanding of the reasoning behind our recommendations and confidence in the resulting choice of investments. The main steps involved are:-

  • Getting to know you.
  • What types of investment may be suitable: pensions, ISAs, collectives, investment bonds.
  • Trying to assess your appetite for risk.
  • Trying to assess the risk that you are able to take, taking account of your age, the investment time horizon, your health, dependants, your income and expenditure, your net worth, insurances held and so on.
  • Discussing these details with you.
  • Trying to ensure that the risk level agreed will be suitable.
  • How best to reflect your attitude to risk in terms of asset classes (the amounts you should hold in cash, fixed interest funds, property funds, share funds).
  • Discussing this asset class selection – is it suitable in the current economic/political environment or should short term changes be considered?
  • Selecting the individual funds.
  • Reviewing


GETTING TO KNOW YOU

The logical starting point of the advice process is for us to get to know you. Our fact find is wide-ranging to ensure that the advice we will give you is soundly based. As well as exploring your personal and financial circumstances, we want to know who you are, what your attitudes and values in life are.

Having established your goals, we need to establish your level of investment experience and knowledge, as well as what level of growth you expect, your attitude to risk and how long you are looking to invest for. We need to also consider issues such as access to your money and the level of flexibility required in the investment selection and your personal circumstances, including your tax position. It is important that any investment recommendation we make is as tax-efficient as possible.

SELECTION OF “TAX WRAPPERS” –

WAYS TO HOLD YOUR INVESTMENTS

Once we have established your financial goals we can begin to determine the most appropriate financial product(s) to meet your needs. A tax wrapper is a financial product, such as a pension, ISA or investment bond, within which your investments can be held and which usually has certain tax benefits.

As well as pensions, ISAs, investment accounts and investment bonds, you may also want to consider life protection and critical illness policies, depending on your circumstances.

Traditionally, investors might have held a number of products from a variety of different companies. The downside of this is that it can create lots of paperwork, arriving at different times of the year, in different formats. This can make it complicated for you, the investor, to manage and monitor your portfolio as a whole, to ensure that your investments are performing as expected and remain in line with your risk profile.

However, for the majority of our customers we recommend investing through an ‘investment platform’. This allows you to hold, monitor and manage all of your investments in a single place or in a limited number of places. Investment platforms offer improved convenience, choice and value for money. It also provides online technology that helps us assess your attitude to investment risk and then put together a portfolio that’s most likely to behave as you’d expect. 

Our investment platform partners offer a full range of tax wrappers:

  • Individual Savings Accounts (ISA)
  • Investment Accounts (unit trusts, OEICs)
  • Onshore Investment Bonds
  • Offshore Investment Bonds
  • Pension Plans


UNDERSTANDING YOUR ATTITUDE

TO INVESTMENT RISK

Whatever your goals, we want to be sure that the investment strategy we recommend for you is in line with your attitude to investment risk. To do this we need to consider a number of factors. They include:

  • how long you want to invest for – the ‘term’
  • how much cash you want to be available to meet unexpected circumstances
  • what level of growth you expect to receive
  • how much money you want to invest
  • whether you have any debts
  • existing savings for retirement
  • your overall view on investing
  • your goals – and the level of risk you are really comfortable to take to achieve them
  • what level of short-term fall in the value of your investments you are willing to accept
  • the importance of protecting your investment from the effects of inflation
  • the question of ‘liquidity’: if you want to cash in your investments, how easy will it be to get your hands on your money?

To establish your attitude to investment risk, we will ask you a series of questions. Each answer produces a score and these are then aggregated to calculate your level of tolerance for risk, from 1 (low) to 10 (high). We call this your risk profile score. 

The risk profiling questionnaire we use is developed by Quilter in association with the leading actuarial consultancy Towers Watson. It is in line with the best industry practice and the guidelines.

DISCUSSING YOUR RISK PROFILE SCORE

Your risk profile score is an indication of the extent to which you are prepared to accept a short-term fall in the value of your investments as markets go through their ups and downs. These fluctuations in the value of investments are also known as their volatility.

If your score is 1, then low volatility investments such as cash or bank deposits could be the resulting investment recommendation. If your score is 10, then we might recommend a portfolio which includes investments in asset classes such as emerging markets which usually have higher volatility.   

Before proceeding to make recommendations based on your score, we want to be sure that you understand what that number means and what its implications are. We will discuss with you how investment gains and losses might differ between different risk levels, to give you a better idea of the outcome you could expect at each level. In this way we can agree with you whether your risk rating accurately matches your true attitude to risk.

Whatever the result of that initial discussion, we will carry out the same process each year at the annual review stage to ensure that your circumstances have not changed and that your attitude to risk remains the same.

Assessing the level of risk you are prepared and able to take is always difficult. We could ask questions such as “where do you see yourself on a scale of 1 to 10?”, and although useful it would not on its own provide a full risk assessment. We therefore try to ask a number of different questions that attempt to assess your financial circumstances and your tolerance to risk - in other words, are you prepared to see the fund value fall some of the times, and are you able to bear such losses should they occur?

Throughout all of this, you must ask yourself:-

Do I need to take risk? You may have a particular aim, for example to achieve a sum in 10 years’ time of £50,000 from a starting level of £43,000. You may determine that as you only need a net return of 1.5% per year then leaving funds in a deposit account with very minimal risk is the right thing to do, without increasing risk unnecessarily. 

Do I want to take risk? You may have a particular aim, for example to achieve a sum in 10 years’ time of £50,000 from a starting level of £30,000. The net return needed would be about 5.4% every year. You may not be able to achieve the required returns by leaving the funds in a bank deposit, but you decide that you are uncomfortable with more risk and so determine that if there is a shortfall in your aims, then so be it. 

Can I afford to take risk? Would you face hardship if the value of your investments fell? Is this investment your only source of savings or capital?

If answers to any of the above are no, we should probably re-assess your risk profile now and possibly de-risk towards cash-based investments only, or consider alternatives.

Other Factors That Need To Be Considered

You may wish to consider other factors:-

What experience do you have in investing? If you have no previous experience of investing in stocks and shares, the ups and downs of valuations may come as a surprise. It really is not worthwhile trying to improve returns if this is likely to cause stress or sleepless nights.

Do you have debts outstanding? If so, it is very likely that these should be paid down first rather than trying to make more money through taking investment risk.

What are your objectives? Do you have a specific aim in mind for the investment?

Over what period are you thinking of investing? This is important. For example, should you be investing outside of cash for a period of up to 3 years? You may consider a higher risk if you are investing over 20 years compared to a term of 5 years.

Assessing Risk

The purpose of assessing risk in this way is to rate the responses you provide and then, by using a “risk profiling model to allocate a “risk score” on a scale of 1 to 10. Each level of risk maps to an expected level of volatility and an asset allocation designed to perform accordingly. Effectively, the risk targets are spread at 10% intervals of global equity (including the UK) volatility. For example, risk level 5 will be 50% of global equity volatility, risk level 6 will be 60% of global equity volatility, and so on.

This can never be an accurate expectation of course, rather a predicted range of outcomes using the portfolio tool referred to.

We refer to the risk numbers as follows, including an approximate split between main asset classes.

Risk Number

Description

Cash and

Fixed Income

      %

Property Funds


             %

Equity Funds


         %

          0


100 Cash



1

Very Low Risk

90

3

9

2

Low Risk

80

3

17

3

Cautious

69

4

27

4

Moderately Cautious

58

4

38

5

Moderate

49

3

48

6

Moderately Adventurous

40

2

58

7

Adventurous

30

0

70

8

Highly Adventurous

18

0

82

9

Speculative

 8

0

92

  10

Very Speculative

 0

0

  100

Please bear in mind that these risk numbers are really a measure of risk in terms of volatility (by how much the portfolio may differ over its long term average) and this may not in fact agree with your definition of risk (which may for example be the risk of losing money). 

There are many considerations:-

  • The risk of losing money.
  • Your appetite for risk – you may be prepared to take risk with an investment, but should you? For example, do you have debts to repay and would repayment be a better use of your money?
  • Your appetite for risk – you may be prepared to take risk with an investment but can you afford to? What if the risk produced a loss – could you afford this loss? 

This is where further discussion becomes important, rather than simply accepting a risk score. Before explaining the risk numbers in detail, the following will give an indication of what they mean in terms of volatility (a range of likely outcomes).

Possible Range of Expected Annual Returns

Risk Level

Upper Return

Average Of All

Returns

Lower Return





0

Cash Returns







1

6.79%

2.80%

- 1.20%

 




2

11.10%

3.50%

- 4.11%

 




3

15.72%

4.22%

- 7.29%

 




4

20.73%

4.99%

- 10.75%

 




5

25.30%

5.69%

- 13.93%

 




6

29.70%

6.36%

- 16.98%

 




7

34.30%

7.06%

- 20.19%

 




8

39.22%

7.79%

- 23.64%

 




9

43.81%

8.47%

- 26.87%

 




10

48.35%

9.10%

- 30.15%

The model above, developed from Quilter’s risk profiler with advice from Towers Watson, tries to indicate the range of “expected returns” from the risk levels 1 to 10, and the average of all possible returns within the range of each level of risk. It is important to remember that the figures generated are not intended to be and should not be taken as a projection of the likely returns from the various risk levels, merely a support to the general risk discussion.

They show the implied volatility and mean expected return of the risk levels 1 to 10 to two standard deviations (ie all returns are expected to be within these extremes in 95 out of 100 years – a 95% confidence level). The arithmetic average returns and the ranges assume returns are based on a log normal distribution. Figures are shown net of tax and underlying manager fees.

For example, for a risk scale of 6, the highest expected return in 95 years out of 100 would be + 29.70%, with a 2.5% chance that the returns could be higher. The lowest expected return in 95 years out of a 100 would be minus   – 16.98%, again with a 2.5% chance that the returns could be lower. The average of all possible returns would be 6.36%.

Considering this chart can help to understand what each level of risk means.

SUITABILITY

After we have discussed which tax wrapper and risk level is appropriate for you, it is important to look at which investment solution may be suitable to meet your needs.

There are a range of options available; for example, we can individually select funds to construct an investment portfolio for you, or a ‘packaged solution’ may be more suitable, whereby you invest in a single fund or portfolio which contains a number of underlying funds, designed to match your attitude to risk.

Choosing the correct investment solution depends on your personal circumstances and the factors we discussed during our fact-find meeting, such as:

  • how long you’re willing to invest for
  • whether you need to access your money
  • how important cost is to you
  • whether you need a wide choice of investments
  • your investment knowledge and experience
  • your desire to be involved in investment decisions
  • whether you’d like regular updates on your investment
  • how often you’d like your investment to be reviewed.

There are a number of flexible investment solutions designed to meet these needs.

CREATING AN “ASSET ALLOCATION”

IN LINE WITH YOUR RISK PROFILE SCORE

Once we’ve established your risk profile, we then build an investment portfolio which suits your needs. We do this through ‘asset allocation’. This involves mixing different assets, such as cash, property, fixed interest and UK and International equity (shares), to build a portfolio that matches your attitude to risk.

Different types of assets have different performance and risk characteristics, so our aim is to allocate the right mixture of funds to your portfolio so that, over time, the peaks and troughs of their performance balance each other out in a way that is optimised for your particular risk profile and your performance expectations.

Asset allocation is based on long-established and well-proven mathematical principles. For this part of the advice process we rely on Towers Watson, the leading firm of Actuarial Consultants. Towers Watson has significant experience in providing such information, with 40% of FTSE 100 companies’ pension schemes as their clients.

You should be aware that even with this level of expertise behind us, we still can’t guarantee that the volatility range of a particular asset allocation will not be breached occasionally. As with all types of investment, there is always the possibility of exceptional market conditions, due to unanticipated external events.

SHORT TERM DIFFERENTIATION

Investment models tend to take a long term approach of course. As appropriate, and after discussion with you, we sometimes suggest shorter-term deviations from the agreed long term investment approach. For example, there may be circumstances where equities are, or we think may become, extremely volatile, and a switch of some funds to a cash haven may be appropriate.

SELECTING INVESTMENTS TO

MATCH YOUR ASSET ALLOCATION

Once the asset allocation stage is completed, we need to choose appropriate investments to reflect the various asset classes in the right proportions. There are thousands of investment options to choose from, including Unit Trusts and OEICs, Investment Trusts, Exchange Traded Funds (ETFs) and Hedge Funds.

All these options try to achieve different things. Understanding the reasons for their relative success helps us appreciate how they may perform in the future.

One of the first and biggest decisions to make is whether to take an ‘active’ or a ‘passive’ approach to investment management. An active approach is where fund managers use their skill to select stocks they think will perform better than average or better than the benchmark in a particular sector. The passive approach is where funds don’t try to beat the index; they just try to match it as closely as possible. Typically the cost of active funds is greater than passives.  Both have their appeal in different circumstances.

Given the volatility around stock market investments, carefully selected active fund managers may be able to identify opportunities for ‘outperformance’ (doing better than average).

On the other hand, because the variability of returns in a portfolio is mostly the result of asset allocation rather than the specific choice of funds, there is sometimes little need to take the risk of active management. A passive approach is often the cheaper option, and can also be a much purer way of representing the different asset classes.

A mixture of the two approaches may well be appropriate to try to achieve the most favourable results.

There are many ways of judging the performance of fund managers – their past performance is not necessarily a guide to what they might achieve in future. A better way to assess a manager’s performance is to understand how and why they achieved that performance.

FUND SELECTION

When considering investment funds, it is appreciated that what you really want is performance, and therefore our prime criterion in selecting a fund is constancy of performance (quartiles 1 and 2) against its peers in the relevant asset class over periods of 1,3, and 5 years.

We also consider the volatility of the fund, the level of risk of the fund as measured against a suitable benchmark.

As well as these quantitative measures, we may also require a qualitative assessment of a fund. 

BUT

We do not restrict our choice to funds that only have a rating as outlined above. We feel that to do so may impose limits that become too stringent when trying to maximise the potential for return.

By combining all these selection criteria we can be confident of selecting suitable funds to build a robust portfolio.

In addition, buying any investment fund is a long-term decision so there has to be ongoing monitoring, measurement and evaluation; this is the final phase of the advice process.

MONITORING AND REPORTING

The performance of the various funds in your portfolio will differ over time. Because of this, if left for a long period of time, the proportions of different asset classes will change and this could result in a divergence from your original risk profile. For example if equity funds outperform fixed interest your portfolio left unaltered would move up the risk scale.

Every 12 months we assess the performance of our portfolios and their component funds. We look for any outperformance - or underperformance - that might need further investigation. Funds are assessed using the same criteria as in the fund selection process. If we feel it necessary to change a fund within your portfolio we will contact you and ask you to authorise the switch

Portfolio valuations are available at any time by request but otherwise we will provide them every six months or at intervals agreed with you.

AND

Our platform partners allow you access to track and monitor your investment online, enabling you to keep as close an eye as we do on the performance of your portfolio.

ONGOING REVIEWS

We also monitor and assess the performance of your investment for discussion at your regular reviews. At this time we may also ask you to complete a further risk-profiling questionnaire. That’s because your attitude to risk might have changed if your personal circumstances have changed.

The process used for the initial construction of the portfolios is also used for the ongoing monitoring and management of them.

If your risk profile score changes we can discuss transferring you to a different investment solution that is more suitable for your needs.

OUR FEES

For details of our fees please refer to the separate Service Schedule provided


Free Consultation

You can have a free initial consultation. There's no fee, no catch and no obligation on your part. 

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