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Adviser Guides

Updated: Guide to risk profiling

Published by FTAdviser | Apr 18, 2012

Failure to assess your clients’ attitude to risk can have serious consequences in both legal claims for inappropriate advice, client rebellion against ongoing fees and action being taken against you by the regulator.

This updated guide to risk profiling will help you make sure the tool you select meets the regulator’s requirements and ensure you pick the right product for your client.

Answers supplied by Paul Resnik, co-founder of FinaMetrica, Anna Cook, senior proposition manager of Aviva, and Vaughan Jenkins, director of Bluerock Consulting.

  1. Q: What should I expect from a risk profiling tool?

    Many risk profiling tools have been criticised for a one-dimensional focus on a client’s risk appetite or attitude to risk.

  2. Q: What different risk profiling tools are available?

    Some risk profiling tools have been built with little or no scientific basis behind them.

  3. Q: What are the pros and cons of risk profiling tools?

    Profiling tools are often embedded within a wider software package or available on a standalone basis.

  4. Q: What are the FSA’s risk assessment requirements?

    The FSA remains concerned about the high number of unsuitable investment sales it sees in the pension and investment market.

  5. Q: What will happen to IFAs who fail to assess risk?

    The FSA’s guidance paper singled out simplistic quizzes as being the antithesis of quality personalised outcomes.

  6. Q: What if I fail to pick the right risk profiling tool?

    Failure to deal with risk issues in a professional and effective manner can have serious consequences.

  7. Q: What should I ask risk profiling tool providers?

    Provider of tools should be proactive in offering information about how their tool works.

  8. Q: What does ‘risk required’ mean?

    What risk is required to achieve a customer’s investment objectives as closely as possible.

  9. Q: What does ‘risk perception’ mean?

    How a client interprets risk can be different for different individuals.

  10. Q: What does ‘risk capacity’ mean?

    This refers to a customer’s capacity for loss, i.e. the amount of risk they can afford to take based on the amount of money they are willing or...

  11. Q: What does ‘risk tolerance’ mean?

    Risk tolerance is psychological. It expresses how an individual feels emotionally about taking risk.

  12. Q: How do you assess a client’s risk tolerance?

    Risk tolerance is a most challenging variable to measure.

  13. Q: How do I pick the best risk profiling tool?

    By understanding the target market for the tool, the strengths and limitations of each tool and the extent to which it compliments your broader...

  14. Q: How much should I pay for a risk profiling tool?

    Risk profiling tools are available directly from organisations offering risk profile tools and also via product providers, platforms and back...

  15. Q: How do I make sure the tool works effectively?

    Where attitude to risk is being benchmarked against model portfolios, you will need to ensure that the asset allocations and risk category...

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