Risk-ratings cannot replace due diligence

An increase in risk-rated funds can be seen to take the legwork out of assessing client risk and matching with an appropriate fund via collaboration between client and adviser. But due diligence when working with clients should always be at the forefront of interactions, whatever streamlining is done by the provider.

Justin Onuekwusi, lead fund manager of multi-index funds at L&G, highlights potential problems for advisers. “I think that a lot of advisers don’t appreciate how much a risk-rated fund could drift between profiles over time,” he says.

Risk-rated funds bring up issues around ongoing suitability that advisers need to take into consideration when helping a client select a fund. Even if a fund ticks a box for initial suitability, there is no guarantee it will be suitable on an ongoing basis. “Unless they’re going to constantly monitor the risk-rated fund on an ongoing basis it’s hard to guarantee ongoing suitability,” says Mr Onuekwusi.

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Advisers must also be wary of relying on the literature provided by fund management companies. While some material is very strong and provides a lot of detail, a lot of it does not. It is important for an adviser to really look under the bonnet of what the manager is doing, and it is not merely a question of carrying out a risk profile and aligning fund to that rating.

While risk-rated funds have been designed to help the adviser, there is no replacement for carrying out the appropriate due diligence. For more information on risk-rated and risk-targeted funds, and how advisers can best assess clients’ attitude to risk and capacity for loss, see the feature on risk in this month’s Money Management.