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Ryan Nauman
VP, Product and Market Strategist
Stephen Berei
VP, Client Services & Implementation
Jeremy Poulin
Senior Client Consultant

RDR – Applying an Institutional Investment Approach to the Retail Sector

Dec 30, 2011 Stephen Berei


Throughout Europe important structural changes are being made to the retail investment advice industry. In the UK, this is being implemented under what the Financial Services Authority (FSA) calls the Retail Distribution Review or RDR, an initiative that will be enforced starting December 31st, 2012. The FSA’s key objective is to give consumers confidence that the advice and products they buy are best suited to their requirements. The post below will discuss the practical implications for advisors as they look to bring the high quality, consultative approach used in the institutional world to retail investors.

How can it be implemented?

Whatever post-RDR model an Independent Financial Advisor (IFA) assumes, the practical implementation may not seem so easy. An institutional-type approach to investing requires an FA to ask and answer many questions. It’s important to have available a set of robust tools, in order to answer these questions in whole. There are four main steps in the model that are typically seen in a fee-based financial advice process.

Step 1: Asset Allocation and Portfolio Optimization
To answer questions within the first step of the process, a quantitative portfolio optimization tool can be used. The FA must build the client’s “efficient frontier” to see various asset allocations across different risk profiles and compare to a client’s existing portfolios. Monte Carlo simulations can then be run on those portfolios to determine which portfolio distributions would most suit the needs of the client’s current situation.

Step 2: Manager Selection
Once determining a strategic allocation of the client’s portfolio, the FA must select the products included in the portfolio. One can screen the products through the correct category or IMA sector and utilize measures of return, risk and capital preservation to build a short list, while ensuring correct benchmarks are used for benchmark-relative measures.

Step 3: In Depth Analysis and Due Diligence
After a short list has been created, one must perform in depth analysis and due diligence. Much insight on a product’s value can be seen through a flexible platform allowing for customization of charts, tables and graphs. One must look at not only the risk of benchmark-relative measures, but also consider measures of volatility/uncertainty, loss of capital/drawdown and tail risk. The FA can also build the portfolio or blend of those products to run in depth analytics on the portfolio as a whole.

Step 4: Ongoing Reporting and Client Reporting
Finally, after the three steps above have been completed the FA must distribute and explain their decisions in a clear, concise and simple manner; as to avoid the use of complex statistical terms and jargon. The FA can provide the client with customized reports suited to the needs of the analyst, investor and the investment policy statement guiding the decisions made.

How can Zephyr help?

Our products, StyleADVISOR and AllocationADVISOR are tools already used to aid in the help of the above analytics. They have been embraced by those investment professionals leading the revolution to providing institutional-quality financial advice to retail investors. We hope and look to continue that trend.

For a more detailed discussion of the practical implications of RDR please see our publication here.

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