The FSA began 2011 with the release of an important guidance consultation paper, Establishing the risk a consumer is willing to take and making a suitable investment selection.
The advice failings identified in this paper will raise many questions, so it is important the recommendations are put into context.
The approach of the retail distribution review has accelerated the ambitions of advisers to develop stronger businesses and improve their client offering. For some, this includes redefining services and remuneration models to capture the opportunities that lay ahead for our profession.
These aspects of compliance and treating customers fairly and the development of stronger businesses are inextricably linked and we can examine the findings against the backdrop of building a better advice business.
The FSA’s core concerns are:
- the risk of advisers abdicating responsibility to software systems that cannot replicate the particular client knowledge a professional adviser will achieve; and
- the risk of advisers using poorly constructed processes, whether that is an individual element of the process or the way in which elements of the process relate to each other, to draw incorrect conclusions.
How can advisers make best use of the tools available?
Risk assessment tools are playing an increasingly significant role in supporting the advice process but no riskprofiling tool can replace the skills and experience of a professional adviser.
However, there are tools that can help in structuring the advice process and a robust, repeatable and independent process should be the corner-stone of advice for advisers to work with their own knowledge of the client.
Risk questionnaires can be excellent tools for building a dialogue with the client about risk and advisers should adopt an appropriate method that has been designed and tested by those qualified to do so.
Next, the adviser should explore meaningful examples that are realistic and relevant. Key themes to be explored with the client include value at risk to describe likely outcomes in monetary terms. General attitudes to risk and loss are a good starting point but a true understanding of the client’s willingness and ability to taking on risk can only be achieved by examining the specific requirements for each client goal.
A meaningful dialogue should take place and it is possible that adjustments should be made to reflect this. The adviser should then construct a financial plan that illustrates the likely journey a client will experience.
An holistic planning approach is by far the most effective method of showing the relationship between a client’s financial affairs now and in the future to help a client put the range of likely outcomes into context.
Powerful and robust asset modelling techniques can be used here to describe realistic likely outcomes over time and compute a range of factors that can influence these, such as inflation, investment performance and fees.
The risk and financial planning should then integrate with a solid but flexible process for deciding an investment strategy that meets these needs.
The FSA has recognised the common failures to meet the agreed risk profile with relevant and well structured investments and it makes several mentions of the importance of diversification in managing risk.
The adviser must also use techniques to ensure the solution remains suitable for the client over time. It should all be managed within a live plan that is revisited and amended to reflect the changes a client experiences over his or her lifetime, according to the adviser’s service proposition that is agreed with the client.
In meeting the challenges and adhering to the recommendations set out in this paper, advisers can mitigate advice failings and enrich the client experience in equal measure. I urge all to see this as an important opportunity for the new year.
Neil Stevens is managing director of Verbatim Asset Management