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Risk tools offer pain but no gain

Advisers have questioned the accuracy of risk profiling tools and statistical modelling, saying they can be unreliable.

At the Platform Evolution conference in London, Skerritt Consultants head of investment Andrew Merricks said risk modelling tools are a growing concern because they seem to be backward-looking.

He said: “A lot of risk models have let people down over the last 18 months because risk models all seem to be looking backwards.

“If you look at most risk model tools, a lot still have property in there, a lot say gilts are low risk but those risk models also said that corporate bonds were low before the crisis we had. Those risk models were saying you have got to be overweight in UK equities because they know your risk. All of that is questioned.”

Capital Asset Management managing director Alan Smith agreed, saying: “I have an issue with asset allocation and risk profiling tools because essentially it is trying to determine how much pain the client can stand and give them that exact amount of pain, whether they need it or not. We like to flip it round and say how much pain do you need, if you need any.”

Merricks also criticised statistical modelling. He said: “We do not use them because I question them. It is the same with the forecasting that goes with house prices. You can bring forecasts out but you can never really flag up how bad it can be.”

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