View more on these topics

Ben Goss: Three risk-profiling misconceptions

There are clearly two sides to risk profiling; establishing the investor’s risk profile and understanding the potential investment’s risk

Goss-Ben.Distribution-Technology.2014.jpg

Using a risk questionnaire on its own is good enough. 

There are clearly two sides to risk profiling: establishing the investor’s risk profile and understanding the potential investment’s risk. 

If these two things are done with the same risk definitions and boundaries, granular asset class assumptions and data definitions, your tool  or process should be reliably translating and communicating the nature of risk from client to investment manager via the adviser on a consistent and granular basis.

With a professionally constructed and properly tested model, you should be able to articulate the range of likely outcomes to clients in a transparent manner where there is a shared language of risk and the client fully understands the potential likelihood and nature of making a loss.

Asset models and fund risk profiling is backward-looking, relying solely on historical volatility. 

While this is true of the synthetic risk and reward indicators required in KIIDs, it does not apply to a good asset model or fund risk-profiling service.

When looking at a fund, one should consider first its current asset allocation exposure. That gives a view on likely potential strategic risks. We also look at the manager’s mandate and their ability to move into riskier asset classes as well as their track record of managing within a given risk profile.

Estimates for volatility, correlation and future returns by asset class are all factored in to any profile as well as looking at historical performance.

Risk profiling is the same thing as risk rating. 

This may sound like semantics but the difference is important. While research firms rate which funds they feel will perform best in a particular sector or peer group and have built their businesses around this, risk profiling assesses investments on their risk alone
and should not attempt to rate a fund manager’s likely success or otherwise from a performance standpoint as there are many strategies managers can utilise to deliver their mandate.

What clients want first and foremost is a clear risk-return mandate set for any fund or portfolio they invest in. 

This approach has been successfully used to manage institutional pension funds for many decades. 

The key thing is to translate that mandate from the investor to the fund manager on a consistent basis.

Ben Goss is chief executive at Distribution Technology 

Recommended

Axa-Logo-500x320.jpg

Axa targets Budget reforms with flexible unit-linked guarantee launch

Axa Life Invest has launched a new unit-linked guarantee product designed to give savers more flexibility over how they take their retirement income. The provider has launched Secure Advantage+ in a bid to capitalise on radical pension reforms announced during the Budget. The reforms, which come into force in April 2015, mean anyone aged 55 […]

Better business graph-Shelton-22May14

Better Business: Preparing employees for change

Most people experience an emotional cycle when faced with change. This varies by individual and by the type of change and can start with shock or denial before going through anger and self-doubt before people accept and finally embrace change. Anything with financial implications will have much greater impact than almost anything else. Recognising the […]

Data-Corporate-Finance-Business-Pen-Graph-Growth-700x450.jpg
8

Sipp complaints up 50% as FOS warns on Ucis

The Financial Ombudsman Service saw a 49 per cent increase in complaints relating to self-invested personal pensions in 2013/14. In 2013/14 the FOS received 1,039 Sipp complaints, up from 697 complaints in 2012/13. The FOS upheld 63 per cent of Sipp complaints in 2013/14, compared to 61 per cent the previous year, and says the […]

Tech-Technology-Computer-Binary-700.jpg
2

The Platforum: Which advised platforms are seeing the biggest growth?

Assets on advised platforms rose to £274.41bn as at the end of March, a jump of 3.4 per cent for the quarter. The latest UK Adviser Guide, released this week, shows the biggest assets under administration movers were Cofunds, Standard Life, Skandia and FundsNetwork, although unlike the end of 2013, only Cofunds added over £1bn to its […]

Iain Chadwick

The Budget 2015: a brief overview

Following George Osborne’s delivery of his sixth Budget as chancellor and the last of this current parliament, we have provided a brief overview of the initiatives put forward in his statement, focusing on the topics that have an impact upon the pensions landscape, savings, personal taxation and businesses.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com