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Suitable investments sit outside a client's comfort zone

Suitable investments sit outside a client's comfort zone

There is a "tension" between portfolios which might be suitable for individuals and the ones which will make them feel comfortable, a conference has heard.

Speaking at the Personal Investment Management & Financial Advice Association's (Pimfa) fintech conference yesterday (12 September), Greg Davies, head of behavioural finance at Oxford Risk, said investors could well be uncomfortable with the "rational" portfolios advisers might recommend for them but which might be most suitable for those clients.

He added portfolios which made a client feel comfortable were unlikely to meet their needs.

Mr Davies said: "There is always a tension between giving people the perfect portfolio and watching them make mistakes with that versus just giving them a comfortable portfolio that's a long way from what they need.

"Finding the balance between those things is not easy and requires some judgement. I genuinely don't think there is a right suitability answer to that."

Last year, as part of its suitability review, the FCA found 90 per cent suitability in the pensions accumulation advice market and 91 per cent in the retirement income advice market.

Mr Davies said advisers should work behavioural finance into their practices, and gave the example of Mifid II's 10 per cent drop rule.

Under Mifid II, clients must be notified if their portfolios drop by 10 per cent or more, but Mr Davies said this could have negative effects.

He said: "What do you think happens when you send a whole bunch of people, out of the blue, a letter that says 'don't panic'?"

Instead he recommended keeping in regular contact with clients to make sure they didn't suddenly panic when they were told about their portfolio dropping.

Others have also pointed to flaws and potential unintended consequences stemming from the reporting rule.

Rory Percival, former technical specialist at the Financial Conduct Authority (FCA), now head of his own adviser consultancy, told FTAdviser in February: "Advisers need to recommend the investment that is appropriate to the client's risk profile and attitude to risk.

"If an investment is right for them it’s right for them and [drops are] just the way markets behave."

Mr Percival had worked on the FCA's advice suitability study.

damian.fantato@ft.com