We need to talk
Since the FSA issued its risk and suitability paper, it is clear that some see risk and suitability a bit like a mathematical proof - there is only one correct answer. It is like an expansion of the efficient frontier graph where the object is to select an asset allocation that plops it right on the curve.
For me, risk is the central conversation where investment forms part of the financial plan. Filling questionnaires or determining capacity leaves too many aspects uncovered. I know this makes online advice problematic but that should not block us moving towards a more effective process.
I had a client who registered as an aggressive investor despite having only six years to retirement. His bullishness was more a reflection of his impatient personality than his wish to take benefits in six years. By having a dialogue with him, we arrived at a more appropriate risk profile, so when I see major providers launch questionnaires as if they are the risk equivalent of a silver bullet I despair.
This is part of a trend to try to automate the advice process, reducing the need for the adviser and the risk or possibility of miselling.
This has one major flaw, if the client’s circumstances and preferences do not fit the matrix, then the process fails or it compromises. This is a problem irrespective of client type but is magnified when the client is a couple and not an individual.
I am certain that disciples of “software can do anything” will reject my concerns but they are prepared to deliver advice that is closest to someone’s needs and not aligned with their needs. This is very similar to transactional models where advice is not provided or where advice is confused with product selection.
Once we pass to 2013, a common discussion with clients will be on the value that the process adds. This process could be one-to-one advice or using a web interface. Either way, the costs for an off-the-peg solution will need to be far less than a bespoke approach.
Software is a tool, not a one-for-one replacement of a professional adviser. It can sort and calculate but can it reflect the conflicting requirements of a couple and bring them to a solution that works for both? Watching how people react to questions or statements of their partners is not easily replicated electronically. The amount of effort expended on cutting corners on simplifying advice processes has been colossal. If one-tenth of this had been expended on behavioural research, basic financial education or due diligence on products, I suspect we would not have the current level of bills from the FSCS. Instead of looking for the easier way to do business, more effort could have been directed at providing high quality advice.
Advice and risk are difficult, which is why the risk conversation is so important. The regulator provided the catalyst to this discussion and it is important it keeps its focus and does not compromise with less than adequate approaches to the issue of risk and suitability.
Perhaps efficient frontier was not a truly analogous example maybe spot the ball is more appropriate. Don’t forget the random nature of that competition it was never one of skill.Defining risk profiles is more conversation than anything else.
Robert Reid is managing director of Syndaxi Chartered Financial Planners