IFAs looking for additional ways to provide value for money to their clients should embrace the institutional strategy of factor investing, says Hymans Robertson Investment Services (HRIS). Factor investing is a well-known institutional strategy that’s used to add value while reducing costs. As part of their responsibilities under Consumer Duty advisers not only have to provide value for money but, they have to evidence it. As the industry approaches the first anniversary of Consumer Duty implementation, it is the perfect time to test factor investing, says the leading DFM.
Factor Investing works through targeting assets with certain characteristics or factors. These are: value (cheaper share price), minimum volatility (lower risk stocks), size (small cap), quality (strong financial metrics), momentum (following price trends) and growth (above trend growth). Diversification should be at the core of any factor investing strategy because no one factor is consistently the best, and performance varies year-on-year over shorter periods. This is because some factors could underperform the broad equity market and other factors might perform, well at different stages of the economic cycle. All this makes a multi-factor approach one of the most valuable strategies for building a portfolio that delivers value while better managing market volatility and risk.
Commenting on the value that can come from advisers looking to institutional investment strategies, Kate Rainbow, Head of Key Accounts, Hymans Robertson Investment Services, says:
“To date, there has been relatively limited use of factor investing in the retail market but, this will likely grow considering the regulatory climate and also the needs of their client base.
“As the age profile of advisers’ clients increase and DB schemes become less common. Advisers will find that their clients will look to them even more to help them fulfil their retirement needs. So, the methods that are used in the institutional space to meet the needs of mature pension funds could be very useful.
“This means that the blueprint that the institutional investment managers have already laid will be particularly useful and advisers should actively explore methods that will help them meet the needs of their evolving client base.”
Commenting on how multi-factor investing could help advisers meet their needs around providing value for money, Kate said:
“Factor investing is an evidenced based approach that has the potential to reduce investment costs while enhancing returns. This is what IFAs increasingly need as regulators demand more insight. Consumer Duty requires advisers to evidence a number of things about the service they’re providing to their clients. Value for money is one of those elements that they need to show they’re delivering consistently, along with ensuring that they’re managing risk effectively. This strategy can address both of those requirements and also serve to help advisers differentiate themselves.
