PlatformsMar 23 2016

Mystery shop exposes lack of platform risk tools

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Mystery shop exposes lack of platform risk tools

Millions of UK investors who build their own portfolios are in danger of putting money into unsuitable products due to a lack of platform risk tools, a personal finance expert has warned.

Andrew Hagger, who works for financial research house MoneyComms, carried out a mystery shopping exercise on 19 online investment platforms.

Of the platforms he assessed, only 10 had filter tools for investors to help them match funds to their risk profiles.

The tools allow customers to add alerts to flag when fund performance has dropped below a pre-set level, for example.

Five of the nine platforms with no risk filters, however, did offer model portfolios, which use the platform’s own interpretations of risk rather than industry-accepted parameters.

In the report, commissioned by online investment platform Rplan, Mr Hagger suggested there is a generation of investors who are not taking financial advice and who are at risk of misinterpreting the terms platforms use.

“Without a risk filter the inexperienced DIY investor could be influenced by levels of performance, and human instinct would see many seeking above average or higher end returns if they are new to investing without appreciating the risk of such an approach,” he said.

Mr Hagger called for industry-recognised risk indicators which platforms should adopt.

Nick Curry, director at rplan.co.uk’s, said the absence of risk analysis tools is “surprising”, adding that these tools are a crucial part of the investment process and a straightforward tool to install.

“Platforms should be giving their clients straightforward explanations of how to assess their own desired risk levels and clear guidance on how to match their investments to that.”

“There is a danger that clients don’t really understand risk regardless of what they are told online.” Scott Gallacher

Scott Gallacher, chartered financial planner at Rowley Turton Private Wealth Management, said online platforms tend to talk about volatility or historic losses over certain time periods, and rarely talk about the historic peak to trough losses.

“Whilst more tools would no doubt be helpful, I suspect some platforms might be reluctant to offer them for fear of being held responsible for people’s potential losses.

“There is a danger that clients don’t really understand risk regardless of what they are told online, and a detailed conversation with a real adviser can be key to helping people avoid expensive mistakes.”

Mr Gallacher said the counter argument is whether advisers accurately match clients’ portfolios to their particular risk levels, but pointed out that in these circumstances at least clients benefit from regulatory protection.

“If DIY investors, whether guided by robo-advice or not, unwittingly end up with a risk mismatch then there is arguably no one for them to blame but themselves.”

katherine.denham@ft.com