Advisers could be misleading clients on risk: FinaMetrica

Advisers’ assessment of risk is poor and often leaves clients over-exposed and not fully aware of the downside potential, FinaMetrica has warned.

In a new research paper, the risk profiling provider stated that many advisers offer unsuitable advice based on poor perceptions of their clients’ risk profile.

It added that the higher commission or fees that tend to be offered on higher risk products may also affect advisers’ decisions, while they also rely on illustrations that downplay the downside risk.

“The end result is that many clients are over exposed to risk and do not understand the risks that they are taking,” the paper stated.

In the paper, ‘On the ability of risk tolerance’, FinaMetrica attempted to dispel the adage that client attitude to risk changes in bear and bull markets. Instead it claims that it is perception of risk that alters, rather than actual risk tolerance.

The report added, “When markets fall, it is easier for advisors to explain client unhappiness as being caused by a collapse in risk tolerance than it is to recognise the shortcomings of their advice and accept responsibility for it.”

It said the analysis of both its own data and other risk studies show that risk tolerance is a “stable psychological trait” rather than being influenced by market conditions.

FinaMetrica also said advisers do not place enough emphasis on the importance of risk tolerance, saying it is “simply a box to be ticked for compliance purposes before moving on to the real business of advice”.

However, Shelley Robertson, marketing manager at Distribution Technology, said it is not fair to refer to it as just a box ticking exercise, as ultimately it helps to ensure that advisers have happy customers.

“I think since the FSA’s first paper on assessing risk last year the issue has very much come to the fore. While 20 years ago the focus was very much on gain, now the industry is older and wiser and that has to be to consumers’ advantage,” she added.