Portfolios managers, are you paying for risk targeting? If so, stop. Our Risky Business, July 2024 report shows it’s a waste of money.

The risk targeting framework is a process where the portfolio manager adopts the strategic asset allocation model of the risk rating agency. It adds significant expense to portfolio managers and our research suggests there are two reasons why it’s unnecessary.

1. The turnover of funds between risk bands is low (3-5% annually for one risk targeting provider).
2. The length of the grace period, plus frequency of advisers’ annual client reviews, mean funds and portfolios can remain out of alignment for more than 9 months.

In our interviews for the report with representatives of asset management firms and DFMs, the revenue model of risk profilers was one of the areas that came under fire the most. The price paid  by portfolio managers depends on the service provided and the range of funds rated.

With smaller risk rating providers, most portfolio managers are paying a base of £20K per annum for risk ratings. However, for larger providers this figure can increase to hundreds of thousands of pounds depending on the number of funds being rated, whether risk targeting is being utilised as well as for additional services such as MI and marketing. Several fund managers stated that they pay upwards of £200K per annum to individual providers.

Risk targeting is hugely expensive and portfolio managers tell us they have seen prices continue to increase over inflation, with some citing over 10% year on year for the past three years. With so much focus on price these days, this is one area where asset managers could reduce cost.

You can find out more about the Risky. Business report here.