Firms looking to build automated advice solutions into their websites must think carefully about the construction of risk-tolerance assessment tools, FinaMetrica has warned, pointing to the liability risk of unhappy customers come the next significant market correction.
A worldwide study with more than 500,000 of the firm’s customers who have taken its psychometric risk test, showed that many investors have been getting it wrong.
FinaMetrica found that 21.2 per cent - over 100,000 - customers incorrectly estimated their true risk tolerance by a significant margin.
Paul Resnik, the suitability firm’s director, commented while some of the risk assessment tool widely used by direct-to-consumer propositions may look fantastic and be easy to use, they are nonetheless fatally flawed.
“Most tools lack robust validation to ensure customers are accurately and scientifically assessing their risk tolerance; they are essentially risk ‘guesstimate’ tools,” he argued, adding that those accountable for compliance at these providers need to take action “to prevent a deluge of unhappy customers who will understandably feel hard-done-by come the next significant market correction”.
The problem becomes particularly acute should an actual adviser be taken out of the loop, as with the next generation of automated or ‘robo’ propositions.
“I urge any provider currently looking at building ‘robo-advice’ propositions to think very carefully about investment suitability and not to make the same mistakes in a blind rush to market.
“Don’t cut corners when it comes to suitability, if you do, your proposition will most likely fail in time.”
A recent review by the Financial Conduct Authority revealed that close to 60 per cent of investment advice files investigated involved advice that was potentially unsuitable.
Its recent thematic review found just 40 per cent of wealth managers’ portfolios were suitable, with demands made of several firms to do much more in ensuring that the portfolios they recommend to clients truly reflect their investment needs and risk appetites.
Mr Resnik added: “My new years’ message to the industry, both direct and advised, is to make sure you have a robust, defensible risk profiling process that protects your customers’ interests and your own business reputation. Don’t be part of the next industry scandal.”
The FCA and HM Treasury’s Financial Advice Market Review has robo-advice as an option to bring advice back to the market.
According to the FCA, options to improve access to advice could include: encouraging advice in accessible locations like libraries or post offices, supporting the development of online advice and sharing the costs of advice with employers, or subsidising the cost.
The FCA stated new and emerging technologies present opportunities and challenges to provide cost effective, efficient and user friendly advice services.
peter.walker@ft.com
