‘Imminent risk’: Financial advice practices could fail in new economic environment

From

Dr Jerome Lander

Leading Australian portfolio manager Dynamic Asset Consulting warns that financial advisers are putting their businesses and their clients at serious risk by implementing traditional strategic asset allocation (SAA) portfolios.

Sydney-based Dynamic Asset Consulting (DAC) provides end-to-end business solutions for Australian financial advice practices though actively managed discretionary accounts (MDAs).

Portfolio manager Dr Jerome Lander said most Australian financial advisers are still operating client portfolios based on a view that interest rates will continue to fall.

“The new reality is that rates are bottoming out and can’t fall much further in a historical context, and if they do then mainstream asset prices are probably in big trouble anyway,” Dr Lander said.

“In the US we are seeing the effects of abnormal policies, including big tech names like Apple and Tesla being thrown around on pure speculation in what is becoming an increasingly erratic asset pricing environment.”

Dr Lander said portfolios need to be managed differently in an environment where major economic risks and crises loom large.

“Most portfolios recommended by financial advisers are based on a low inflation environment and falling interest rates,” he said. “That is the benign environment we have had. It is not the environment we are moving into and it increasingly unlikely to be the environment of the future. This is a key inflection point in markets and an opportunity for advisers to protect their clients and their business from what is coming. The world has changed.”

SAA portfolios face imminent risk

Strategic asset allocation (SAA) has been a popular investment strategy among financial planners looking to balance risk and return for their clients. For example, a traditional approach has been to allocate 60% of assets to shares and 40% to bonds.

But according to Dr Lander, the conventional wisdom of this strategy can completely fall apart during an inflection point.

“The 60/40 portfolio split is now a very risky way to run a portfolio. I couldn’t sleep at night running a portfolio like that. There is an urgent need for action right now.

“The bubble is not actually just in equities as most people think – it is in bonds and traditionally defensive assets. We could be entering an environment where you get absolutely no return out of cash and bonds, and little on property and equities over time. We could also see bonds and their proxies get totally destroyed, particularly if we get stagflation.” he said.

“Governments are likely to keep doing everything they can to create a more inflationary environment or fail completely in a deflationary death spiral.  What’s becoming rapidly less likely is that they’ll walk the tightrope successfully and continue with an ideal low inflation moderate growth environment. Central planning is likely to fail sooner or later.”

Bonds have traditionally held a defensive position in portfolios; however, Dr Lander warns they have become an increasingly risky investment in the current climate with a sub-inflation return outlook.

“Defensive assets are broken. Growth assets are expensive. Passive investing no longer works. In this environment an active, dynamic approach to investing has become critical,” he said.

Seizing opportunities with active management

With market volatility expected to continue, Dr Lander believes there are plenty of opportunities for investors.

“It is probably one of the worst times to be an index investor, yet one of the best times in history to be an active investor as a result of the distortions we are seeing in markets.” he said.

“There are many areas of the market that are sensible places to allocate capital, yet which aren’t making the papers and that advisers aren’t necessary being made aware of.”

Dynamic Asset has recently opened its portfolio management services to independent financial planners (IFAs). The group’s goals-based multi-asset MDAs provide a complete end-to-end business solution for Australian advice practices.

Managing director Matthew Walker said it has become increasingly clear in recent months that financial advice practices require a different way of managing client portfolios to generate absolute returns in the new economic environment.

“Tracking the market with passive index funds and failing to manage the new and increasing risks just won’t deliver the results that investors need,” he said. “What the wise do in the beginning, fools do in the end.”

“Portfolios need to be managed actively, goals-based and able to respond rapidly to the ever changing economic environment.”

Mr Walker has 30 years’ experience as a financial planner and launched Dynamic Asset in 2013.

“We determined that we were not prepared to accept the status quo on how we needed to run our client portfolios,” he said. We are now opening the door for other financial planning businesses to use the same service.

Dynamic Asset offers a plug-and-play, whole of business portfolio management solution for financial advisers across both retail superannuation and wealth.

The actively risk-managed Dynamic Asset Long Term Wealth Builder portfolio has outperformed well-recognised institutional peers, delivering a 5.41% per annum return over five years, 6.0% per annum over three years and 1.48% over the 12 months to 31 July 2020 (net of all fees).

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