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Taking the risk Out of risk

One of the inevitable trials of giving financial advice is that from time to time you come across clients who really need their heads testing. They will be unreasonable in their expectations, so how do you introduce a little more reality to their thinking?

At the very least, you should be able to document fully that you have made it clear what it is reasonable for them to anticipate from their investments. Shortly, it will be possible to carry out tests on clients to address this situation.

Every once in a while, you come across something that is a truly fresh and innovative approach to tackling problems that have been challenging the industry for a long time. This is one of the refreshing things about working with technology.

All too often, such originality will come from organisations outside our market sector. So, while they may have a good idea, there is always a question mark about whether they will be able to convince enough people to buy into the product. When the new approach comes from one of the biggest suppliers of systems to IFAs it has to be good news.

Currently, 1st Software supplies systems to over 900 IFA businesses, including 39 of the top 100 IFA firms, at 1,200 sites with 8,500 users.

It is widely recognised by life offices as the software provider that has led the way in delivering integration between the life company extra-nets and IFA back-office systems, for the seamless electronic delivery of valuations.

As this is one of the software houses I work regularly with, I consistently find it delivering valuable additional facilities to make it easier for its customers to work more efficiently. Last week, I was given a sneak preview of a soon to be launched investment risk profiling tool.

Accurately profiling a client&#39s attitude to risk has certainly been an issue. One of the most challenging issues in this respect is how you deal with the situation where a client makes specific statements about risk profile which does not match with the rest of their behaviour.

Working with Silent Partner, a specialist consultancy which uses behavioural psychologists to identify scientific approaches to financial services issues, 1st Software has developed a tool that uses a mixture of mathematical assumptions, programming logic and psychometric testing to arrive at a more detailed understanding of a client&#39s attitude to risk than any other software package that I have seen from a UK company.

According to Tom Williams of Silent Partner, most customers are cautiously greedy. They ask for the highest possible return with the lowest possible risk in the shortest timeframe. It is important for the adviser to manage an investor&#39s expectations.

The software achieves this by first identifying a client&#39s risk tolerance – the amount of risk they are prepared to accept. It then defines their return expectations.

It is important for these two factors to balance and if they do not the adviser will need to take steps to establish more realistic expectations. The software provides an audit trail of each of the questions asked, responses given and where answers conflict.

In this case, by selecting a conflicting response, the answer may be reconsidered. However, the system captures any change in response and the reasons behind the change. It is very important that these questions be answered by the client, not the adviser giving their impression of the client.

The system then goes through a series of psychometric tests to identify the client&#39s decision styles. This will identify both their decision speed, the basis on which they are likely to make a decision and their decision regret, how they are likely to react to a decision that goes wrong.

From this, the software will define an asset allocation between high, medium and low-risk funds to match the term of the proposed investment and the client risk tolerance.

As clients may have different attitudes to risk for different types of investment and investment terms, the software allows the creation of as many different analyses as may be needed and can recall this at any time in the future.

With the benefit of hindsight, consumers will invariably look to blame someone else if they have gambled and lost. This can result in a complaint which can be time consuming and financially damaging.

In the current environment, with virtual meltdown in the professional indemnity market, innovation of this type must be welcome. As the pension review has shown, under the present regulatory system it is not what you did but what you can show what you did that matters.

The ability to create an audit trail to show a risk profile was scientifically identified and the investments matched to that profile must mitigate the PI risk. The launch of this service is due for release at the end of May. It will be provided as an upgrade to all existing users of the Adviser Office package without additional charge.

The additional income potential of these tools should not be overlooked. Equity market conditions in recent years provide dramatic evidence of how important it is to rebalance clients&#39 investments regularly. Inevitably, the decline in investment returns will have had a significant effect on clients&#39 expectations. With the advent of the menu approach, I would see this as a service that could be charged for by advisers. At the very least, for those who are able to offer it, it should appear as part of the services offered.

Many advisers are reluctant to be seen to be using technology in the advice process. Employing accepted scientific techniques to complement the adviser&#39s own skills must be seen as a valuable way of providing additional value to clients.

Some advisers are reluctant to be seen to be using external aids but I believe that this is more a matter of their own perception than consumer resistance and that, in fact, the use of such services will be seen by consumers as being a real benefit.

You could say that it is all in the mind.


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