Income with a ‘suitability hat’

When looking for income, we know that you face some real challenges in today’s market environment. But balancing the need for income with long-term suitability can result in a thorny dilemma - is it possible to achieve both?

 Targeting a specific yield may address the need for income, but it can result in a fund or portfolio that substantially deviates from a given risk profile. When income is easier to achieve, a portfolio will be able to take less risk to hit its yield target. When yields on asset prices are low, however, a similar level of income may only be achieved by taking on more risk. Targeting yield therefore means that the risk of the portfolio by definition will be variable. Importantly, however, this may mean that a portfolio becomes inconsistent with a client’s attitude to risk over time and is therefore unsuitable.

Targeting yield...means that the risk of the portfolio will be variable by definition

We believe that the answer to this dilemma lies in targeting a specific level of risk, as this helps to ensure suitability. The portfolio should then be designed to deliver the strongest return for that level of risk. Only once this is achieved should the portfolio be tilted towards income-generating assets. This would mean the portfolio would be able to deliver income whilst remaining consistent with a client’s attitude to risk and allows advisers to align the risk attitude of their clients to the funds and hopefully avoid any nasty surprises.

The only guarantee you have in investing is that fees will detract from returns

Another challenge for investors and advisers is finding a solution that remains cost-effective as returns are tilted towards income generation. This is a difficult problem that requires some innovative thinking to solve. The challenge for advisers and product providers is to continue providing a high-quality service, but to do so at a lower cost. Finding this solution is especially important because those people who are potentially being priced out of the advice market are the high net worth clients of tomorrow.


Any solution must remove some of the key costs from the advice process. This can be achieved by moving more towards index funds, which of course have dramatically lower costs than their active equivalents. Also, bringing them together in a diversified multi-asset portfolio greatly simplifies the adviser’s research, due diligence and transactional workload. Unfortunately, multi-asset income funds tend to be more expensive than their growth counterparts. Considering the fact that these strategies are primarily aimed at long-term investors and those in retirement, this can have a real impact on outcomes over time.


We know that many fund managers tend to have large resources of people and systems in order to add value and meet investor requirements. Yet there is still no guarantee of strong performance over time. The only guarantee you have in investing is that fees will detract from returns, therefore whether the preference is for multi-asset funds with actively-managed underlying strategies or a fund of index funds, it is so important that costs are minimised over time.


Higher costs will not only detract from returns immediately; long-term returns are also hurt as there is less to compound in future years.

a need for straightforward, cost-effective investment solutions that offer active asset allocation

From speaking with advisers, we know that there is a need for straightforward, cost-effective investment solutions that offer active asset allocation and will help meet advisor's requirement for suitability. Advice must be bespoke and the products must be appropriate for the investment goals and especially the risk tolerance of the individual client. A genuinely risk-targeted fund – not just a fund that is ‘risk rated’ – could help to provide a solution to the problem and index funds will play a vital role in this.  


Risk-targeted multi-asset income funds are the next step in the evolving investment solutions landscape and they continue to grow in number and assets under management. If these funds succeed in being consistent with specific risk profiles without forgoing investment returns, both advisers and their clients will have peace of mind. As long as the client’s attitude to risk doesn’t change, the funds should remain suitable, while maintaining a focus on delivering an income that is sustainable in the long term.