The financial services sector should use clear and consistent language for describing investment risk in order to prevent clients being disappointed, a suitability expert has said.
FinaMetrica pointed to the wide range of terminology associated with an investor’s risk tolerance and investment risk, and urged financial firms to adopt an industry-wide vocabulary which can be easily understood by clients.
Paul Resnik, director of FinaMetrica, said: “The whole premise around investing is that you largely get paid a return for taking on risk. Yet, bizarrely, there is no agreed way for how the industry discusses risk with clients and no agreement on what different risk terms might mean.
“The result is that any two people can derive very different meanings from the same risk concept.”
The risk profiling firm published a report which pointed to the benefits of clear and consistent communication between the industry and its clients.
The report ‘Moving Towards a Consistent Risk Language’ also proposed standardised terminology, which it asked people to comment on.
Mr Resnik, who also co-founded the firm, said: “We have argued for a long time now that a sound understanding of clients’ risk tolerance can help discourage portfolio churn and, ultimately in turn, ensure that financial firms keep their customers for longer.”
He said the standardisation of risk language is the “missing link” that can ensure there are no negative investment surprises for the customer, helping them grasp how the level of risk they choose to take on aligns with their own expectations.
FinaMetrica also called on businesses across financial services to contribute to a practical toolkit which offers guidance on adopting the standardised risk language.
Economist and consultant Stuart Erskine, who helped compile the report, said this is the first report to bring together all the different terms of risk.
“The paper is not intended as a set dictionary of terms but more as the outline for a vocabulary that is designed to kick-off conversations in the industry, so that we can start working towards agreed standards around how we talk to clients about risk.”
