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FSA warns on risk-profiling tools

The FSA has proposed guidance on assessing the suitability of investment advice and has warned that many risk-profiling tools could lead to flawed results.

In a guidance consultation paper, published this week, the regulator reveals that out of 11 risk-profiling tools assessed it identified nine tools with weaknesses which could lead to “flawed outputs”.

The review included tools designed in-house by firms and those provided by third-parties, including platforms. The FSA declined to provide Money Marketing with a list of the tools it identified as having weaknesses.

The FSA says: “Tools can usefully aid discussions with customers, by helping to provide structure and promote consistency. But they often have limitations which mean there are circumstances in which they may produce flawed results.

“Where firms rely on tools they need to ensure they are actively mitigating any limitations through the suitability assessment and ‘know your customer’ process.”

The warning follows a review of existing data held by the FSA and new information collected from firms on the way they risk profile clients and allocate their assets.

The regulator says out of the 366 investment files it found to be unsuitable between March 2008 and September 2010, over half were deemed to be unsuitable because the investment selection failed to meet the customer’s risk profile.

The review included cases from previous thematic work and a sample of risk-profiling and asset allocation methodologies used by banks, insurers, IFAs, discretionary and advisory investment managers, networks, platform providers and third party tool providers.

It acknowledges these figures may not reflect the quality of discretionary management or pensions and investment advice across the whole of the market, as the review in some cases focused on higher risk firms.

The FSA says: “The high number of unsuitable investment selections we see in the pensions and investment markets is still a significant concern. It is a specific risk to our consumer protection objective.

“The level of failure in this area is unacceptable. We have taken, and continue to take, tough action to address these failings with individual firms.”

The regulator found many firms it reviewed considered attitude to risk but did not take into account the client’s ability to absorb a fall in the value of their investment.

It also expresses concerns that client risk questionnaires often use poor question and answer options, have over-sensitive scoring or attribute inappropriate weighting to answers.

The FSA says it has also seen examples where firms are failing to have a robust process in place to identify customers that would be best served by putting their money in cash deposits due to an unwillingness to risk loss of capital.


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There are 41 comments at the moment, we would love to hear your opinion too.

  1. 1) Perhaps the FSA can TELL us what constitutes an effective risk profiler.

    2) They are, however, correct to say that avoidance of capital loss is not identified readily enough. There is a perception that you cannot invest funds for a client in this case, although of course providing the timescales fit with FSCS backed products of any type (including bank accounts)

    3) Finally, perhaps the FSA can TELL us what constitutes an effective risk profiler.

    Did I also mention that perhaps the FSA – instead of telling us what DOES NOT constitute an effective risk profiler – could tell us what DOES.

  2. If the FSA have found flaws in any platform risk profile tool then why are they not telling us!!!!!
    Surely it is in everyones interest to have this information and be able to act on this.

  3. It would have been helpful if they’d told us which of the tools they found to be unflawed. Of course there are going to be problems if people ignore the tools and simply recommend whatever fund(s) they happen to favour that month. At the end of the day they are just tools and so cannot be used in isolation.

    Given current cash returns and inflation rates I would have though that putting all one’s money in cash depsoits is a HIGH risk strategy other than for the very short term!

  4. so which ones are flawed? The guidance consultation doesn’t appear to list them. Come on MM. Be useful & give us the list.

  5. ALL profiler tools, model portfolio’s etc will never be perfect. Wouldn’t it be a refreshing change if the FSA lead the way in creating a best practice tool. If their attitude was to serve and protect the financial services industry, which in turn would serve and protect the end user.

    Very few could argue with a dictatorial best practice

  6. susan the finance 7th January 2011 at 9:42 am

    when I attended an FSA meeting I was recently ‘invited’ to attend, this very subject came up and I asked why the FSA does not construct it’s own tool which we all compelled to use. The response was that they do not have the expertise ‘in-house’ to construct such a document. I then asked why don’t they outsource the project, to which he did not respond! I agree with the previous comments in that the FSA is ALWAYS ready to say what they dont want, but they are very slow at telling us precisely what they do want!

  7. Isn’t this typical FSA

    They don’t like this and they don’t like that and yet they do not offer any reasonable guidance.

  8. Money Marketing – are you waiting for enough of us to shout out before you issue the list?

  9. Why not do away with all these tools and now treat all clients as individuals and thereby tailor advice to each client on an individual basis? Is one size fits all finally dead?

    Think I am suffering from deja vu, as wasn’t this what we used to do 10-15 years ago until we were told we had under TCF to treat clients the same, ie if they were similar clients they should expect the same outcome.
    I agree with the above the FSA need to stop telling us what is wrong and unsatisfactory and start telling us what they consider to be right!
    Mind you we will probably argue with that and tell them they are wrong 🙂

  10. Reading between the lines another area for the FSA to highlight and justify there existance. I totally agree with the above point ok where do we go from here why dont you offer a solution? Its not good enough just to hammer the area!

  11. I was always taught as a child that I should NEVER say something was wrong unless I was prepared to give an alternative. Basic commonsense and good manners I was told. Perhaps the FSA should look to themselves and instead of just criticising ALL the time perhaps some constructive recommendations should be the order of the day.

  12. not wishing to seem cynical but it seem like it wouldn’t be in their interest to tells us what they actually want or make it crystal clear because they wouldn’t be able to fine any one for getting it wrong then,

  13. What an appalling waste of an opportunity by the FSA. If they are serious about improving outcomes for customers they need really need to brush up on their communication skills. The paper was titled “Guidance Consultation”. There was a complete lack of meaningful guidance and no request for feedback, so failing on both counts.
    Which profiling tools passed muster?
    What risk descriptors did they find good or acceptable?
    How did they decide on what they considered to be suitable investments for a particular risk profile – or did they use theeir usual 20/20 hindsight?

  14. @Chris F (point No 3) see susan the finance’s post “The response was that they do not have the expertise ‘in-house’ to construct such a document”

    @ susan the finance. If the above is true how do they have the expertise to know what constitutes a flawed risk profiler?

    I am not expecting you to answer that by the way I am just pointing out the ludicrousness of their position, but hay-ho we cannot have a lifetime bureaucrat putting their neck on the block can we.

  15. Interesting point made by Susan the Finance. it occurs to me to wonder how, if the FSA does not have the expertise to create an in-house tool, they have the knowledge to criticise them.

    And all such tools are, when used by a competent and careful adviser, merely the basis for a fuller understanding, knowledge and discussion of the clients’ attitudes to risk. Now what I really would be interested in is the FSA’s assessment of the various asset allocations that exist out there, since that is the end result of risk analysis. And, of course, for the FSA to publish their results.

  16. I would really, really like to know whether the risk profiler that I use is deemed acceptable.

    What about an FOI request to the FSA from Money Marketing?

  17. Surely the FSA know that any tools used are just the start of the process, and I am confident that most FSAs help their clients further to pass on knowledge and tailor their clients needs. I just wish the FSA would get to know their FSAs and pass on some wisdom

  18. Just had a quick look at Money Made Clear website – guess what? There is no summary descriptor of what constitutes low, medium or higher risk, especially in a diversified portfolio, although it does explain risk for specific products. Interestingly if views ETFs as high risk and yet we are expected to include these in all client’s portfolios under RDR. The FSA really needs to pre proactive in its guidance instead of lobbing in the grenade and closing the door.

  19. Fraser Brydon - IFA 7th January 2011 at 10:25 am

    Bet they approve of Dynamic Planner from Distribution Technology…..but will they go public, hint hint….

  20. Neil F Liversidge 7th January 2011 at 10:39 am

    I have been telling clients for years that asset allocation tools only provide a starting point for asset allocation and that a ‘reality overlay’ is essential. Any given tool will produce the same result for a given set of answers today as it would three years ago, but yields have shrunk. Hence 3 years ago we were bond buyers but now we are sellers of all but short duration bond funds and high yield, but the ‘models’ still say ‘buy bonds’. We’re also ignoring the ‘model’ advice when it throws up Eurozone investments, anticipating a fall in the Euro. Is the FSA realising at last that if we are to do the best for our clients – which we want to – we can’t be answering to those with a traffic warden mentality all the time?

  21. There is no no-risk products, as already said here, deposit accounts are likely to lose value in real term. Anything other than deposit based accounts will have some risk, whether this means access to money, inflation, variable rates, volitility of underlying investments or the financial strength of the provider or the accuracy therefore of the credit reference agencies. Some risks are not forseen based on so called reliable information or misplaced provider guarantees, and some risks seem reasonable based on track record of the fund but are then impacted by extreme reaction of markets.

    It is perhaps a case that we are clear when establishing the clients attitude to risk that the client is aware that the potential fund choices represent the average and not the extreme based on past performance and is no guide to future performance and that there is the potential for worse performance at the wrong time for the client. if the client is unhappy with this potential downisde risk then the funds should not be recommended. Covering this point and documenting it should cover the adviser in my opinion.
    The danger with these FSA comments is that without clarity of what the FSA thinks advisers should do rather than not do, there is a risk that risk profilers will become too extreme and over cautious in it’s results, This would therefore rule out perfectly good fund choices, ie the one which might provide a better performance. Too much negativity from the FSA may lead to pressure from advisers to have tools which cover the risk to the adviser to the extreme. This could also lead to further disenchantment from clients who might not get the performance from investments that they had perhaps hoped for, therefore reducing investment across the market and working against the long term objective of the Gov’t in addressing the savings gap, and the consequences this might have.

    Lastly, we want to avoid the situation whereby we are expected to stipulate the extent of the limit to the downside and then be sued by the client because he decides to cash it in at the bottom of the market, or in situations whereby the client says one thing to determine his risk profile at the time of the investment, but changes their attitude to risk without due notice to the adviser, where the adviser could undertake a review and rebalance the portfolio.
    The worse case scenario we want to avoid somehow is the risk to the adviser in a situation whereby the adviser has done a perfectly good job, and then the client claims that his attitude to risk was different in retrospect, perhaps to gain compensation against the adviser. We have to remember the adviser cannot influence or control the product performance and we should not leave ourselves open to spurious claims based on poor investment perfomance or attitude to risk.
    The FSA should be clear how they expect us to advise in this area, point to the tools seen as acceptable and then refrain from retrospectively applying judgements against our profession.

    This type of transparency will be best all round, the rules to be clear, the advisers follow the rules with clear understanding and without differences in interpretation, and this clarity visible to the client,. The client then understands the decision they are taking at the time and then this to reduce the instances of dissatisfaction with the advice process. Of course satisfaction with the product is another matter and the advisers cannot be expected to bare the brunt of disatisfaction with the performance of funds if the information at the point of research and presentation is clear and also importantly, concise, and the investment strategy has been agreed with all parties.

    Clients also have some repsonsibility to be clear in saying if a level of risk is not acceptable and also not be seduced by their own greed at the point of establishing investment strategy , only to say later that they did not understand the risks.


  22. Like everyone else, I am sick and tired of the FSA dictating to us what we shouldn’t do, but declining to tell us what we should. The problem is that they don’t know. Much of what they do is destructive rather than constructive. They told me years ago that they are nonprescriptive and would wait to see what we do and then fine or even ban us if they didn’t agree with it.

    The sooner they go, the better.

  23. Debbie Armstrong 7th January 2011 at 11:10 am

    Interesting comment about ETFs. You don’t need to include them if you have a valid reason for not using them, but you must know what they are and consider them. One key concern is the lack of FSCS rights with ETFs! A possible major misselling review for the future for people jumping in head strong to ETFs without explaining the downsides and something the regulator has missed I think?

    There is no such thing as no risk and any risk profiling tool is exactly that – a tool to then use as a discussion point with the client to come up with an actual risk profile for the investment or recommendation you are making. In any event any tool can only give you an output at that time. We all know someone’s risk can change over night and will be dependant on what type of generic area you are discussing, how soon they are retiring etc etc. If anyone can wave a magic wand which can give a risk assessment which is 100% right they must be a magician. We live in the real world which is always full of ifs ands and buts!

  24. “The regulator found many firms it reviewed considered attitude to risk but did not take into account the client’s ability to absorb a fall in the value of their investment.”

    Investment advice will always be subjective. It can be exposed or subject to criticism when exceptional events occur or hindsight is applied.

    How does the FSA explain this principle in connection with the Banking crisis, the single most financial detriment to the consumer in modern history! Why did it not take into account the Banks ability to absorb a fall in the value of their investment/ securities.

    Clearly it was regulating banks, in a similar way that IFA,s assess attitude to risk. My thematic assessment concludes that the FSA risk profile process was either in adequate or non existent.

    I suspect this calls for a round of bonus payments.

  25. Christopher Bearfoot 7th January 2011 at 12:00 pm

    If any other readers genuinely want guidance from the FSA in terms of how attitude to risk should be dealt with, it is already in the public domain.
    This includes the limitations of profile tools and the extent to which using managed funds can end up with a portfolio that fails to match the profile. There are also tips on things such as keeping copies of diagrams that may be used to explain risk as a way of potentially backing up your advice at a later date.

    Have a look at for more details,

    Hope this helps someone else out there …

  26. Christopher Bearfoot 7th January 2011 at 12:19 pm

    A quick PS.

    I’ve just read through the document and, while I agree it would be really helpful to know whether the tools I use are up to the mark in terms of some of weaknesses identified, there are a lot of good practice / poor practice examples in the guidance paper that would allow us to do this for ourselves.

    I for one will be asking my compliance people to check over the processes that we use.

  27. Agree totally with Christopher B. The paper is full of good and poor practice. Rather than ‘reading between the lines’ (of a MM article!!) read the paper itself is my advice. On why FSA don’t recommend a tool this is in the paper….

    “Many firms use tools designed and created ‘in-house’, or ‘off-the-shelf’ tools provided by third parties when making a suitability assessment for a customer. It is important to highlight that the firms providing the advice or discretionary management remain responsible for assessing suitability, even if they use a tool provided by a third party as part of assessing the risk a customer is willing and able to take”.

  28. George Chappell 7th January 2011 at 1:14 pm

    We are now running a 13 week course every Mon – Weds for clients at Aberdeen University to get a degree before we allow them to invest. At the end of the 13 weeks they will sit a test with the pass mask 100%, if they fail they will be set to their bank.
    Thurs – Fri is going to be the 4years advanced course.

    I hope this is compliant


    IFA Training School

    Please put your names down for the first course starts Mon 31st January 9am (sharp) – 5 pm.

  29. Hi Christopher ( Bearfoot)

    I take it you are looking for a job with the FSA?

    Certainly the bonuses are good and it is difficult to see how bonuses can be made by continuing to be an IFA.

  30. FSA statement 1. Some of the risk
    profilers wrong.

    statement 2. We do not have the expertise in house to draw up a satisfactory profiler.

    How can they make statement 1 then. Surely before they comment they should know waht they are talking about. Mind you this has been the FSA from day 1. It will be interesting in 20 years time(or less) when some other body decides what the FSA has made the finan cial services do is detrimental to the client and they should all receivec compensation. Who pays then

  31. most provider tools have always been in favour of there own funds especially Property funds and the only true way to get asset allocation is to go to a independent tool …. in some ways this is still flawed as they are all based on auto re balancing !!!!!! re balanced against what i ask sometimes, in these volatile markets you really need active management not just looking at it every 1/4 or annually to get true returns …. looking at the output from most of these tools it took weeks for them to react to the BP fiasco or what happened in Ireland..there are a few propositions out in the market now that are truly independent and actively managed daily to the clients Risk perspective that i think is the way forward, may be a tad more expensive than the run of the mill but better non the less

  32. @Chris F

    The FSA have clearly cited in CP09/18, that the use of independent tools for ascertaining clients attitude to risk is good practice.

    Distribution Technology provide an unbias risk rating tool as an independent company with no vested interest in how your clients money is invested.

    Basically the FSA are warning advisers of the in-built bias that can be found in provider produced systems such as Skandia’s risk rating tool, which funnily enough links right into their own Spectrum funds.

  33. An interesting warning from the FSA, but let down by the vast level of noise and waffle.
    Let’s take Section 1.13 as an example. “ …where the risk profile of the customer is correctly assessed…”.
    I would be fascinated to hear from anyone in the World who knows how to “correctly assess” risk profile, at the point at which the assessment is made, let alone 30 days or 30 months later.
    Read the literature that has been produced by hundreds of eminent researchers, professors and Ph.Ds and the only conclusion that one can arrive at is that any conclusion is a) likely to be flawed due to the inability of the individual to know their own position, b) will change due to changes in circumstances, and c) will change based on who asks the questions and in what manner, and c) is likely to be culturally biased.
    Any assessment cannot be “correct”, merely a reasoned approximation.
    I would also add here that there is no objective measurement of investment risk. Risk is really a descriptive term like weather or sport; it is not specific. Currently there are no scientifically proven measurements of investment risk that can be consistently applied. All that we have are reasoned estimates, that can vary between professionals. Any doubt on that can be dispelled by reading the financial papers and one can see that “professionals” analyse and deal with the same product in many different ways, implying a different perception of risk.
    Further there is no research that causally relates attitude to risk to portfolio construction, so how is it possible to “select investments that match the risk a customer is willing…to take”?
    I do not doubt the sincerity of the people composing this document, but I do doubt its overall usefulness when, so close to the beginning of the report one can so easy take apart the underlying assumptions of the authors. Are any of them actually competent in probability theory or social psychology? Or merely in cliches?
    The road to hell is paved with good intentions. The road to poor regulation is paved with over-confident, under-qualified regulators basking in their own power and infallibility.
    Risk, attitude to risk, and their relation to portfolio construction is vastly under-researched and consequently misunderstood.
    Because the FSA are answerable to no one (probably not even God) they can of course say and do what they want. However, taking this path in the past has led to so many errors and misjudgements that one would have hoped for a little more humility and intellectual quality.
    Clients are not served well by regulation that, however well intentioned, merely creates fear and confusion.

    And if you do read the report go to Section 4.2. “An investment selection that fails to take account of all relevant factors may be unsuitable”. Firstly, how is anyone, other than God, likely to know if all relevant factors have been taken into account? Secondly, how often have advisers taken into account all factors of which they are aware, made brilliant recommendations, that, within a short time, have proven to be totally useless for reasons beyond their knowledge? The collapse of Lehmans alone must have caused many a heart attack.
    That is the problem with practical advice – advisers, however well trained, are not omniscient. To create regulations on the basis of the type of sentiment used by the FSA is a recipe for continuing disaster.
    I am convinced that the Adviser community wants improving standards. Bad regulation does not encourage improving standards, merely fear and a retreat into advice that one hopes does not elicit the wrath of the FSA. RDD (Retail Distribution Directive) requires meaningful dialogue and development, but there is little hope of that happening because of the intransigent attitude of the FSA. Evidence – read the “Financial Risk Outlook Digest 2010: mentioned in Section 1.1, and be aware of the times the FSA use the word “will”. After ten years of failure to anticipate anything, they still believe that they know what will happen in the future. God – you have a rival.

  34. Well, like the others I am caught between the devil of the FSA and the deep blue sea of the FSA on this issue.

    The FSA in the thematic review of pension switching indicate using a Risk Profiler, the subsequent effect is a model asset allocation and then investment allocation. Previously they did state that Advisors should not place an over reliance on these tools.

    So what is it that they want as TCF is all about process and consistency of behaviours?

    Added to this is the simple fact that model portfolio tools tend not to take account of value at the time of investment.

    So FSA do we follow the model portfolio religiously to the letter or use it to form the basis of investment allocation decisions?


  35. A few years ago I took the FSA to task because their on-line pension calculator (for Joe Public to use) had errors. The answer I received was words to the effect that it was close enough.

    I then pointed out that they would have climbed all over me had I put that on my website and that surely they shold be like Caesar’s wife, they simply ignored me.

    Ne plus ca change…

  36. I’m just wondering how many years the FSA has been doing it’s job before it’s deigned to give us detailed guidance on what is NOT acceptable – and why it hasn’t realised all this time that industry practice is not up to FSA standards? Have they only been reviewing files since 2008? Have the Standards changed? Or have they just kept this minor consumer matter on their “to do” list for 10 odd years?

    Rather than giving the industry a kicking for not correctly guessing what the FSA wants, wouldn’t it be great if the FSA were to:

    1) Give us standard ATR definitions that they want us all to use. This would remove any ambiguity about the suitability of the “labels” and the descriptions attached to the ATR label.

    2) Provide a detailed methodology of how to assess ATR – or a tool / questionnaire of some sort so we have firm guidance to follow.

    These could then be worked into CII exams, statement of professional standing etc and the industry moves forward in one fell swoop (albeit with teeth gnashing from the “I’ve been an adviser 20 years and I know my clients squad”)

    If we all have firm accepted rules to follow we could work within them. I don’t think anyone aims to give “unsuitable” advice. One of the FSA aims is to protect the consumer – surely the best way to do this is to lead the industry rather than poo poo what is being done, and only give vague woolly guidance as to what we should do?

    Come on FSA, if you know enough to criticise and vilify the industry, you know enough to lead it. So can we have something more positive please rather than negative sentiment and threats??

    Don’t kick us…………Lead us……….

  37. GP | 7 Jan 2011 1:54 pm

    most provider tools have always been in favour of there own funds especially Property funds and the only true way to get asset allocation is to go to a independent tool …. in some ways this is still flawed as they are all based on auto re balancing !!!!!! re balanced against what i ask sometimes, in these volatile markets you really need active management not just looking at it every 1/4 or annually to get true returns …. looking at the output from most of these tools it took weeks for them to react to the BP fiasco or what happened in Ireland..there are a few propositions out in the market now that are truly independent and actively managed daily to the clients Risk perspective that i think is the way forward, may be a tad more expensive than the run of the mill but better non the less

    As above above there are few funds out there that actually respond to the market in real time, most look back at what has happened by which time its too late to take advantage/protect from further damage.

    FSA are not there to say what is good, this may be seen as a recomendation or giving advice. They cannot be seen to endorse a product or service, otherwise they may be open to future complaints about the advice given. We all know product providers will lean towards their in house solutions when using risk profile tools it should not be a shock. FSA are trying to do job they are supposed to be doing but yet again fall short on the way they set about it

  38. Many valid points raised in these comments, but if I have sympathy for the FSA. Clearly some comments reflect no understanding of TCF and demonstrate little or no reading of the actual FSA document, but relying upon the MM article. This doesn’t exactly inspire confidence and leaves the FSA presumably thinking that many advisers don’t read their documents, so probably don’t read the disclaimers on the Provider documents / tools etc. So it is little wonder that the FSA are concerned…about many things. Yes it would obviously be helpful if we were told in plain English how to… and what to… but you have to remember that this is an evolving industry (rapidly) and that it is more of a conversation rather than a dictat. That said, much could be done to improve clarity, brevity and GET TO THE POINT from communications. Regulation is far from perfect, but perhaps more constructive dialogue would help us all rather than just a rant.

  39. All been said – Why does the Regulator we pay for not tell us which tools worked – the others will then be incentivised to get their acts together – probably just by tweaking a question or two I bet.

  40. If they tell us what to do and we do it correctly, they cant fine us for getting it wrong! Come on chaps you should have sussed that one out!

  41. FSA should hire English speaking employees who can understand the demands and needs of their customers!!!!!!!!!!!! Also they should learn to aquire the proper licensing to do installs in certain states.

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