Risk-profiling tools no substitute for contact
Advisers are using risk-profiling tools more as a supplement and not as a solution to creating portfolios for their clients, Annalise Toberman has said.
According to the senior researcher at Platforum, advisers it had surveyed were unanimous that they needed to understand their clients’ risk profiles to make investment recommendations and allocate assets.
However, she said advisers regarded risk-profiling tools as part of the process rather than providing the complete answer.
“Advisers stress the importance of capacity for loss and clients’ investment goals as factors they take into account in addition to attitude to risk. How much a client can afford to lose, and how much risk they need to take to achieve their goals, are questions that are generally answered more by follow-up discussion than any profiling tool,” she said.
According to Ms Toberman, advisers have cited complications when using traditional risk-profiling tools, as it can be difficult to map a traditional risk score onto a client’s individual asset allocation.
Complications have also arisen when a discretionary fund manager is appointed to run a client’s portfolio, because the DFM’s assessment of the client’s risk profile may differ from the adviser’s view.
Ms Toberman added: “High net-worth clients looking to pass down their wealth to younger generations have a very different risk profile from those drawing down the natural income from their portfolios, and even more different from those needing to draw a higher income.
“Because of these issues, there appears to be some individual adviser discretion in the risk assessment process – in spite of the fact that many advisers have invested in such tools to help them maintain consistency of the advice process across the client bank.”
In July 2014, the FCA issued its guidance consultation paper on retail investment advice, which included, among other things, whether risk-profiling tools were always fit for purpose.
In December last year, Bruce Moss, strategy director for eValue, warned that both regulation and the investment needs of clients were changing the way advisers used risk-profiling tools.
He said: “Advisers need to ensure that their clients’ financial forecasts are as realistic as possible. This will not only help their clients understand the potential range of outcomes from different financial strategies, but will also allow them to make informed decisions.”
Adviser view:
Danny Cox, a certified financial planner at Bristol-based Hargreaves Lansdown, said: “ As with everything, risk-profiling tools are only one of many at an adviser’s disposal. They provide a good basis for conversation and risk assessment but they aren’t the whole nine yards.”
