Advisers’ use of risk profiling tools is “dangerous” and is likely to lead to complaints, it has been claimed.
Morningstar Investment Management co-head of investment consulting and portfolio management Dan Kemp says most risk profiling tools are based on false assumptions and inadequate statistics that can lead to clients investing in unsuitable funds.
Speaking at the Institute of Financial Planning’s annual conference in Newport, Kemp said: “Mapping a client to a portfolio is like trying to finish a jigsaw with a piece from another jigsaw.
You can do it, but only if you simplify the shape – and that is one of the most dangerous things we are doing as an industry at the moment.
“There is a suitability gap, which will lead to complaints the next time there is a downturn in the market.”
He said most risk profile tools use historic volatility as the key metric for measuring risk, which he argued is wrong.
Kemp told delegates: “Volatility is part of the solution, but advisers also need to consider other measures, such as valuation metrics.
“Advisers should take a more holistic view of risk. Do not allow any tool to overcome your skill as a planner when building portfolios. And if you are going to use tools, make sure they are robust and you know what assumptions they are based on.”
Clay Rogers & Partners managing director Mark Rogers
As a professional adviser you understand the limitations of risk profiling tools and you move with market conditions. So I disagree with the idea that all of these risks would materialise, because as a financial planner you are assessing suitability on an ongoing basis – it is not as if the market moves and two years later the client gets a shock.