Not for the first time the regulator is rushing round like a demented ferret, not knowing what to bite first.
Has its latest work on risk been precipitated yet again by the banks and in particular the recent fine handed out to Barclays?
How relevant is this to IFAs? There is a big difference between a bank customer and an IFA customer. The bank customer is, in the main, a one-night stand while an IFA client usually has an ongoing relationship. It is not uncommon to have been with the same IFA for more than 10 years. IFA customers tend to be better off, better educated and have a better understanding than the typical bank customer.
Risk and defining risk is an imprecise science. I agree with the FSA that a risk-profiling tool is by no means the silver bullet but it is a good point from which to start a dialogue.
One can get philosophical about this amorphous term. I remember a quote from a client: “Harry, I don’t mind taking a risk as long as I don’t lose any money.” I think that encapsulates an attitude for an awful lot of people.
However, it is also invariably true that a person’s risk profile increases when they are making profits and declines when they are making losses. Again, using a personal example, a client at first seemed low risk until further investigation revealed he had a significant equity portfolio with a stockbroker containing some interesting holdings.
Until recently, cash was generally recognised to be bulletproof. Events have demonstrated this is not the case. We now know everything has a risk, it is just a matter of quantifying it – and that is where the difficulties start.
Analysis tools, standard deviation figures and volatility ratings can all be used. But again, regulatory guidance falls short. Whereas a bank might flog one bond to one client, IFAs may advise on a portfolio. Within this there may be higher risk funds. A £100,000 portfolio of 25 to 30 funds may have a mean volatility of four, which could be considered medium risk. But it may include a gold fund with volatility of over 10. That does not mean it is inappropriate, provided the mean of the whole is within the parameters agreed with the client.
Even with comprehensive paperwork, the regulator is not in a position to determine (for portfolio investments rather than individual investments) whether the risk profile is appropriate or not. There is still no way for it to assess accurately because a client is not a number and box-ticking does not cover it. Risk is an interactive and subjective matter and I would hope that underneath all the strictures coming from Canary Wharf, the decision-makers take a pragmatic approach.
The FSA must recognise there are grey areas and that a one-size-fits-all approach is not suitable. What may work for banks and the big distributors is by no means relevant to smaller IFAs.
Harry Katz is principal of Norwest Consultants