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Advisers back risk-profile ‘ticking time bomb’ warning

Advisers have backed warnings that risk-profiling tools could represent a ‘ticking time bomb’ for the advice industry.

Last week, The Platforum cautioned some investors and advisers were over reliant on risk-profile scores.

Advisers say they fear some are also using risk profile tools to cut corners.

Derbyshire Booth managing director Greg Heath says: “We would never use the results of a risk profiler on its own but I do believe there is a risk some firms are taking the results in black and white terms.

“We use a risk-profiling tool as a discussion point and as something to give us a rough idea. We then explain to the client exactly what that means in terms of the definition of that risk and what it means.”

Jacksons Wealth managing director Pete Matthew says: “As advisers we do have to engage with clients in a way they can understand so a scale is useful as people can relate to it.

“But anyone that takes a risk profiler in isolation as read is arguably negligent. We try to talk through with clients what the risk score could mean in pounds and pence and take them through some examples of the possible outcome so they understand what the risk means.”

In May, the FCA urged firms to ensure they were explaining risk scores clearly and said it had ongoing concerns about the application of risk profile tools.

Concept Financial Planning managing director Paul Richardson says: “There are going to be people out there that cut corners. People are paying for advice so they need that extra explanation. Just using a tool can only ever provide a guide.”


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There are 8 comments at the moment, we would love to hear your opinion too.

  1. We agree with both the comments made, if a client two years from retirement is classified by a risk profiling tool as having a high attitutude to risk it makes sense that you consider the clients capacity for loss, time until the financial goal and how much of that goal have they already achieved already.

    Clients also dont have to lump all assets into the same risk bucket, just becuase your pension is within a cautious fund, doesnt mean you ISA’s have to be?

    As Pete said, any attitude to risk tool must be used as a starting point to spark discussion, not the solution to everyones problem.

  2. Marvin the paranoid android 14th August 2014 at 4:53 pm

    Recycling of the FSA Guidance from 2011… do we never listen???

  3. Trevor Harrington 14th August 2014 at 4:55 pm

    Risk profile tools have always been a problem, especially in the wrong hands, and I have warned about this issue for the last 25 years, even before risk profiling tools were invented. It stems from the regulator’s ludicrous desire to label the client, rather than the investment, into a risk “category”, which even a small child will tell you is near on impossible.

    Apart from anything else, 99% of clients do not have any idea how investment works, let alone what risk category they are, and even if they do, they change their minds, as indeed is entirely their right to do so.

    The question of risk and potential reward is just one reason why they come to a professional adviser in the first place, as distinct from a salesman.

    The regulator’s desire for risk profiling, is a classic example of precisely how the regulator completely misinterprets our role and our responsibility with our clients, ignores our warnings about the matter, and then proceeds with it’s own ideas which it thought up in the first place.

    I will give you a simple example:-
    If a client wants to invest £5,000 in the Goby Desert High Technology Fund, are they therefore a high risk or low risk client?
    If that same client has a £10m portfolio, of which this £5,000 is a bit of “play” money, are they still a high risk or low risk client?
    If that same client is also a trust fund which is being held for a 3 year old juvenile, are they still a high risk or a low risk client?

    Impossible to adjudicate on.

  4. The problem with risk profiling and asset allocation is there is no consideration to market factors.

    It is interesting that the FCA are giving warnings of high yield corporate bonds but in the same breath telling advisers that we should have repeatable systems in place.

    So how does an asset allocation model and risk profiling take potential bubbles in certain asset classes into consideration?

    Maybe we can get a comment from the FCA on the subject sure many in the industry would be interested to know.

    Surely if you have a repeatable system and that system has an error you’re just repeating that error many times over.

  5. Strange as it may seem, but I was formerly an adviser with one of the high street Bsnks. This company used a computerised risk assessment program as part of the fact finding process. No great surprise there, however I was once placed on a “development plan” because I used to change apparently far too many risk profiles from the generic response provided by the laptop. The reason for this was I was discussing clients capacity for loss, and reducing the risk if their capacity was insufficient. The powers that be honestly believed that the laptop was pretty much infallible and that I was in the wrong.

    Nice to know a laptop is smarter than an experienced adviser who doesn’t like gambling with other peoples money…

  6. It’s ok to say that risk has been discussed but how an agreed risk profile has been established needs to be clearly recorded in the Suitability Letter to avoid any future comeback. Risk is one of the biggest complaint areas so should be fully documented so that any such complaints can be easily defended.

  7. Trevor Harrington 14th August 2014 at 8:53 pm

    @ MD

    On the contrary, again a huge misinterpretation of the regulatory requirements, and indeed an obfuscation of your own professional obligations.

    As far as risk is concerned, your suitability letter has to declare what risk the investment is, and how that suits the client in their circumstances … not necessarily what risk category you have conjured up for that particular client.

    Again, see my examples above. In short, a very high risk investment may very well suit a client perfectly, despite the fact that you have arbitrarily designated them “low risk”.

    Indeed, as Andy Crowe illustrates, the type of investment which the client is perfectly prepared to take on, is more to do with the perception of that risk in the eyes of the Adviser, who is trying to explain it.

    What price risk profiling tools now ? Pretty useless really, and very possibly quite dangerous in the hands of the wrong people.

    Once again, the regulator is about to reap precisely what it has sown, due to it’s refusal to listen to those who know better than they do. Unfortunately, the professional adviser will then have to pay – as usual.

  8. Despite the somewhat hysterical headline, this is an important and relevant story.

    Some 18 months into RDR, it is evident Financial Advice and Planning is more relevant than ever – even more so with recent changes to the Pension market announced in the Budget.

    Asset Managers, Platforms and other providers can help with risk profiling questionnaires, capacity for loss guides, financial planning tools etc. – but the adviser remains at the heart of the process, ensuring outcomes that are suitable. This includes critically assessing the output of these tools in the context of his and her clients’ needs and objectives.

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