Risk profile

The established risk profile plays an important role is setting constraints within the optimisation problem.

1: Minimum holding period for growth assets

• Description: This constraint sets a minimum holding period for new asset purchases within the optimisation problem. For example, if a listed asset is purchased in the 2019/20120 financial year, and the minimum holding period is set to 5 years the optimisation engine will not be able to sell this asset until the 2024/2025 financial year.

• Purpose: This constraint allows the advice group to ensure that the client has capacity to hold any growth assets for an appropriate timeframe. For example, assume a scenario whereby a client has an objective to purchase property within 3 years. Investing savings that are intended for a property deposit over such as short timeframe increases the potential to lose capital without the capacity to recover. By setting a 5 year constraint the optimisation engine would not be able to purchase assets that would be sold in 3 years time.

2: Minimum purchase value

• Description: This constraint sets the minimum value per asset purchase.

• Purpose: This stops the optimisation engine buying small parcels of stock or managed funds, which reduces the potential burden in implementing portfolio recommendations.

3: Minimum number of direct stocks

• Description: This constraint sets the minimum number of direct stocks required, if an adviser is to use a direct stock portfolio.

• Purpose: By setting a minimum number of direct stocks the advice group can reduce the risk an optimised portfolio is too concentrated.

4: Maximum number of direct stocks

• Description: This constraint sets the maximum number of direct stocks required, if an adviser is to use a direct stock portfolio.

• Purpose: Purchasing too many individual stocks could result in over diversification, as well as transaction costs.

5: Fixed interest – Ensure government guarantee is met

• Description: Setting this as a constraint will ensure that all fixed interest recommendations comply with the $250,000 government guarantee.

• Purpose: Ensures that all fixed interest deposits are backed by the government guarantee.

6. Preferred model portfolio

• Description: This constraint allows an advice group to set a preferred portfolio per risk profile type. When building a portfolio the optimisation engine will attempt to match this portfolio for each product the client is invested in. If the model portfolio can’t be achieved, we will find the next best fit.

• Purpose: This allows the advice group to set consistency with how portfolios are constructed.

7. Strategy settings

• Description: This constraint allows the advice group to turn certain strategies off depending on the risk profile. For example, an advice group may elect to turn off margin lending for a ‘Conservative’ risk profile.

• Purpose: This feature gives the advice group some control over strategy recommendations and eliminates any potential mismatch between recommendations and risk profile.

8. Target asset allocation

• Description: The target asset allocation sets the overall asset allocation per client. This guides the optimisation engine on what portfolio recommendations are appropriate for each given risk profile.

• Purpose: This ensures that portfolio recommendations remain consistent with the determined risk profile per client.

9. Minimum asset allocation

• Description: The minimum asset allocation sets the minimum acceptable exposure to each asset class.

• Purpose: This gives the optimisation problem some room to work with before a penalty for divergence kicks in (see penalty on divergence).

10. Maximum asset allocation

• Description: The maximum asset allocation sets the maximum acceptable exposure to each asset class.

• Purpose: This gives the optimisation problem some room to work with before a penalty for divergence kicks in (see penalty on divergence).

11. Penalty on divergence

• Description: An advice group can apply a penalty on the assumed growth rate of a portfolio on the balance that is outside the acceptable asset allocation range. For example: if a penalty of 0.50% is set and there is a total of $100,000 that is outside the accepted asset allocation range than a penalty of $500 would be applied. An advice group is able to set a penalty over a 1, 3 & 5 year timeframe. It is recommended that the penalty become steeper the longer the duration.

• Purpose: Forcing the optimisation engine to be within the acceptable asset allocation can have adverse consequences due to CGT implications. Rather than forcing a selldown to meet this constraint, applying a penalty allows the engine to work towards the optimal asset allocation whilst taking into consideration CGT implications.