Financial forecasting tool provider eValue FE is testing a visual tool that aims to help advisers explain investment risk to clients.
The tool shows a fund’s volatility based on the likely level of return if an investor measured performance 100 times.
Using smiley face icons, the tool will show the number of likely instances the fund will increase in value substantially. It uses neutral faces to show the number of times it is likely to stay the same and sad faces for when the fund is likely to see a significant drop in value.
EValue FE says it has worked with behavioural finance experts to come up with the system. It is hosting the tool on its website and is asking for feedback from advisers on whether they feel the approach will help facilitate investment risk discussions with clients.
Director of strategy Bruce Moss says: “This type of approach has been tested in other fields but has not yet been used for communicating investment risk. We are keen to hear from IFAs and their clients.”
In January, the FSA published a guidance consultation on assessing suitability of investment advice. It found that nine out of 11 risk-pro- filing tools assessed had weaknesses that could lead to flawed outputs.
Moss is pleased the FSA has raised the issue but adds: “My biggest criticism is that the FSA did not go into the area of follow-up discussion enough and the role of the adviser in explaining investment risk.”
Yellowtail Financial Planning managing director Dennis Hall says: “It is good news that companies are working with behavioural experts to look at investment behaviour but translating that into pretty pictures does not seem to add anything.”