Support for FinaMetrica over risk tolerance plan

The Institute of Financial Planning (IFP) and wrap platform Nucleus have endorsed the plans, which come after the FSA’s damning report on industry risk assessment standards in January.

FinaMetrica director Paul Resnik has been meeting advisers and distributors to discuss the plans. He said: “There needs to be a standardisation of the descriptions of risk - for example, what ‘balanced’ or ‘conservative’ means - as well as a standardised measure of risk tolerance.

“At the moment some systems are unbelievably inefficient, and we want to make the industry more efficient.”

The director said he had “put a proposition” to the FSA, but the regulator has said it does not have a fixed opinion on what the industry standard should be.

“We would argue that a psychometric test is required for the process of assessment,” Mr Resnik said.

“When the report emerges we would argue that a score of between 1 and 100 should be applied. Once someone knows their risk tolerance and how it differs from others they have a better understanding of themselves.

“For their adviser it provides one of the more stable inputs into the clients’ future financial planning.”

IFP chief executive Nick Cann said: “It’s so important for advisers to tune in to their clients’ individual attitudes to risk. The more consistency we get in this area the more clarity consumers get.

“It’s also about ensuring that consumers’ attitudes to risk really are established before advisers make any decisions.”

David Ferguson, chief executive at Nucleus, said: “In general [risk profiling] standards are good, but one of the things the industry does badly is disagree over minutiae. Conceptually it would be a good idea to have one standard.”

In January, the FSA published a report into client risk assessment which found that nine out of 11 risk profling tools assessed had a “high probability that... the output might not accurately reflect the risk that a customer is willing or able to take”.

The regulator then published a set of risk profiling guidelines, titled Assessing Suitability, in March, setting out good practice in order to ensure that firms “have a robust process” for assessing risk tolerance. However, the FSA has so far not issued guidance on how risk tolerance should be measured.

In the paper, the FSA said: “We do not prescribe how firms must assess the risk a customer is willing and able to take, but firms need to ensure they have a clear and robust process that is fit for purpose.”