Behavioural economics has taught us that people are imperfect.
They find losses more painful than gains (loss aversion). They pay too much for an immediate benefit rather than a later payoff (hyperbolic discounting). They mistakenly think future probabilities – such as a potential second year of negative returns – are less likely because of past events (the Gambler's fallacy).
These, and many other behavioural biases, encourage poor decision making, particularly when markets are under pressure. Financial advisers see these human flaws every day. They know the minds of investors better than anyone. But when it comes to changing human behaviour, there's only so much anyone can do.
This is why the best portfolios should be built on the core principles that drive investor behaviour.
Milliman’s range of SmartShield managed accounts combine protection, diversification and affordability, helping advisers build portfolios that work with their clients’ innate tendencies, rather than against them.
Investors have been primed to look closely at the level of investment fees thanks to a sharp focus by regulators, media, and even industry fund advertising. Many advisers also look closely at fees when recommending a product in order to meet their best interests duty.
Higher fees rarely equate to better value. The Productivity Commission found that two out of three MySuper products which charged the highest fees (above 1.5%) were also ranked among the worst underperforming default products between 2008 and 20181.
High fees may become an even bigger issue in future. When markets deliver low or even negative returns, investment fees quickly become a more noticeable drag on performance.
At the other end of the scale, Milliman's SmartShield managed accounts charge total portfolio fees of no more than 0.50 percentage points, giving advisers a cost-effective way to customise clients' overall investment strategy.
Diversification is an important tool in an adviser's portfolio construction toolkit to manage risk-adjusted returns. SmartShield offers well diversified portfolios that invest in easily understood asset classes including equities, fixed income, property, and cash.
Milliman monitors and regularly rebalances these asset allocations as market conditions change.
SmartShield funds can also play multiple roles in a client’s broader portfolio. They can form its core while satellite investments tilt the portfolio towards specific growth opportunities or values aligned with an adviser or client views.
While portfolio diversification is a powerful investment tool, it also has its limits, particularly during a systemic market downturn where all asset classes tend to fall in value. In these cases, specific risk management tools can help manage the impact of a bear market.
Risk management plays a crucial role in keeping investors level-headed during times of stress and on the path to achieving their financial goals.
SmartShield comes with in-built risk management protection against volatility and extended market downturns, which advisers can switch on or off without incurring capital gains tax.
This is achieved by using exchange-traded futures contracts – the protection is dynamically implemented in response to changing market conditions. It allows for more potential growth during strong markets but applies more protection when markets are rough.
The robust risk protection strategy at SmartShield’s core allows advisers to concentrate on delivering tailored client service and growth opportunities, safe in the knowledge that they are delivering a reliable investment approach.
You can find more information about the Milliman SmartShield range at https://advice.milliman.com/en/smartshield.
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An investment in an underlying portfolio, whether with or without Milliman Managed Risk Strategy (MMRS) is subject to market and other risks and no guarantee or assurance is given by Milliman AU or any company in the Milliman group that the use of MMRS in connection with an underlying portfolio will not give rise to losses or that the performance of the MMRS in relation to the underlying portfolio will remove volatility completely or to the extent depicted in an illustration or fully replace losses in the underlying portfolio or to the extent depicted. While generally assets used in connection with the MMRS are liquid, this may not be the case in all circumstances. Further, during periods of sustained market growth, the return to clients from the combination of an underlying portfolio and MMRS should be less than if a client had no MMRS.
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1Productivity Commission Inquiry Report: Superannuation: Assessing Efficiency and Competitiveness, December 2018. p179. Retrieved from https://www.pc.gov.au/inquiries/completed/superannuation/assessment/report.