The Lang Cat principal Mark Polson has warned advisers not to rely on discretionary fund managers to accurately match their risk ratings with those from risk profiling tools when using model portfolios.
The guidance states: “Where a firm creates or uses risk-rated portfolios as part of its Cip, it must ensure the portfolios align accurately with the risk descriptions and outputs from any risk profiling tool it employs.
“It is the responsibility of the firm to ensure this alignment. Where there is a misalignment, there is a risk of systemic misselling.”
Speaking at the Institute of Financial Planning’s annual conference in Newport last week, Polson (pictured) said this statement represents the “biggest risk point” for advisers.
He said: “We often see the adviser asking the DFM to map their portfolios onto FinaMetrica, for example, and it comes out with a result and that is great. But you need to know why, how does one risk-rating map to another risk-rating, and that needs to be recorded.”
Polson said advisers need to be able to explain how a risk rating 2 from a DFM equates to a risk rating 4 from a risk profiling tool if the regulator asks.
He said: “That is not the responsibility of the DFM, and it is not the responsibility of the tool provider, it is your responsibility, and it is a really big one. That is not well understood yet.”
Equilibrium Asset Management investment manager Mike Deverell says: “Assessing risk is a complicated process, as is outsourcing. There is a lot more to it than simply hoping a risk questionnaire has been appropriately mapped to a portfolio.”