Model PortfoliosApr 30 2018

Risk mapping 'is putting advisers at risk'

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Risk mapping 'is putting advisers at risk'

Risk mapping is putting advisers at risk, according to PortfolioMetrix, which offers online model portfolios.

The company said regulated advisers relying on unregulated providers to map the investment suitability process could be putting themselves at risk of providing clients with ill-matched portfolios – and falling foul of the regulator.

In a new paper, titled Risky Business: why the regulator is right to be worried about risk mapping, PortfolioMetrix stated some investment portfolios might be wrong for clients, without advisers being aware, despite the fact they are liable for any mismatched suitability issues.

Mike Roberts, PortfolioMetrix managing director and head of innovation, said: "The issues ultimately come from poor assumptions. The most obvious is assuming the scale labels given to risk-rated portfolios align with those used in off-the-peg risk mapping tools.

"The next assumption that could lead to issues is matching the volatility target of the risk profiling scale to the volatility target of the portfolios.

"The final assumption is that even if the risk profiler firm has done the mapping to the portfolios, that the mapping will not degrade over time."

PortfolioMetrix's paper is based on the company's analysis of the risk and return characteristics for the last five years of the 20 largest (by assets under management) multi-asset funds.  

The company stated the results showed an "alarming variation" in risk/return ratios.

Keith Churchouse, Chartered financial planner at Guildford-based advisers Chapters Financial, said: "There has never been any doubt that the risk assessment lies with the adviser and their communication with the client in understanding risk.

"The client's attitude to and aptitude for risk need to be assessed on an ongoing basis to ensure the investment continues to meet their requirements.

"However, errors do occur and market volatility does change. If the report goes some way towards helping identify and correct misunderstandings further, then it has to have value."