Emma Ann HughesMay 26 2017

Why the best risk profiling tool is you

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Correctly assessing a client’s capacity for risk is both a regulatory requirement and common sense.

Failing to assess a client’s risk profile accurately may result in costly complaints.

Despite these facts some of you still seem to be failing to get risk assessments right.

Last week the Financial Conduct Authority used the findings of its suitability review to warn some advisers were still failing to offset the shortcomings of risk profiling tools, despite its forerunner the FSA having issued guidance on this several years ago.

The City watchdog described cases where firms were not “considering or mitigating the limitations of the risk profiling tool they used, or where the recommended solution did not match the risk the customer was willing or able to take”. 

It doesn’t take a rocket scientist to realise what everyone needs to know is you can’t just rely on a computer to give you the full picture.

“We encourage firms to consider the finalised guidance published on risk profiling,” the report added.

“Should firms identify weaknesses with their approach, we expect them to consider what steps to take to address the issue identified and mitigate any risks.” 

Problems when advisers use risk profilers have included instances where differences emerge between a client’s answers and the tool’s results, as well as inconsistency in an individual’s answers.

On this occasion the FCA ruled out coming up with new rules on how advisers should go about risk assessments and was light on detail about how you should go about identifying “weaknesses.”

But ultimately it doesn’t take a rocket scientist to realise what everyone needs to know is you can’t just rely on a computer to give you the full picture – and that is what the FCA expects you to get when it comes to understanding the risk your clients can take.

The regulator in the past was critical of the first risk profiling systems, some of which amounted to little more than those multiple-choice quizzes like the ones you find in glossy women’s magazines.

The only difference between some of the early risk profiling quizzes and those multiple choice questionnaires in the likes of Cosmopolitan was the former spat out if you were a cautious or adventurous investor while the latter told you what kind of film star would fancy you.

Basically the science (or rather lack of it) was the same.

The regulator was right to be critical of these tick sheets but advisers at least then would have been asking the questions.

Hopefully by being the one asking the questions an adviser used their own eyes to see that just because someone was mainly ticking the boxes that would lead to the conclusion ‘I want to gamble it all on black in the hope of being a millionaire’, their beaten up car and 20 dependants standing outside meant that wasn’t their risk capacity.

Ultimately, the guidance the regulator needs to issue here is: don’t just rely on a computer print out. Use your own common sense and ability to question what you see in front of you.

emma.hughes@ft.com