Will new tech spell the end of ‘cookie cutter’ multi-asset funds?

Written by: Adam French
Modern technology has opened bespoke wealth management up to the masses. But what will this mean for the traditional multi-asset fund approach to investing?
Will new tech spell the end of ‘cookie cutter’ multi-asset funds?

With the recent launch of Vanguard’s direct service, the issue of investment choice has hit the headlines. There are so many different options available, it’s hard for investors to know where to start. Investing via multi-asset funds is often touted as a good solution to the plethora of investment choice and a cheaper alternative to digital wealth managers.

What are multi-asset funds?

Multi-asset funds are off-the-shelf products that combine different asset classes – such as cash, equities and bonds – in different proportions with the aim of creating a diversified investment. They are usually built using fixed weights for each asset class, for example, a typical medium-risk fund would be roughly 60 percent equities, 40 percent bonds.

Buying a multi-asset fund is often seen as easier than investing in several different funds. But there are a huge number of these funds on the market and you have to decide for yourself which one is the most suitable for your savings.

Risk is an important consideration too. Your chosen fund might have a “medium risk” profile in the long term, but its short-term risk can vary enormously. The use of fixed asset weights discussed earlier means that the risk of these funds fluctuates with the risk in the markets, generating unexpectedly high losses in periods of market turmoil.

Research by Cass Business School found that private investors often sell during those times of turmoil. This means that, over the long term, they typically earn a lower return than they would have done had they stayed invested. This is exacerbated by investors selecting their own risk level when they don’t typically know what magnitude of loss they should expect from a medium-risk fund in a bad year.

Multi-asset managers can also have opaque charging structures so investors may end up paying more than originally anticipated. Typically, an investor will need to buy the fund from a platform which incurs an additional fee.

What are digital wealth managers?

By contrast, digital wealth managers offer a service. Thanks to modern technology, the bespoke wealth management services previously reserved for the super wealthy are now available to the mass market.

Best of breed digital wealth managers use technology to address the issues mentioned above. They help you find out how much risk is suitable for you and then select the best funds for you, independent of any particular fund provider and based on objective criteria. They construct personalised, globally diversified portfolios which are monitored continuously against your risk tolerance. Furthermore, any assistance required through any part of the service is provided via email and phone.

Digital wealth managers are able to create a smoother investing experience by using fluid rather than static weights for the different asset classes. This means that negative surprises are avoided as money is shifted out of asset classes going through a high-risk phase, into a lower-risk alternative until things revert back to normal.

Digital wealth managers aim to combine low costs with a bespoke investment experience. The cookie-cutter approach of multi-asset funds appears outdated when compared to this new way of technology-enabled investing.

Adam French is founder & CEO of Scalable Capital, a digital wealth manager 

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