Great article below on risk profiling, you can read the full article on Adviser Business Review: Read Full Review.
ABR editor Rob Kingsbury reports on Rory Percival’s presentation on risk profiling at the Thesis Asset Management ‘In pursuit of Excellence’ seminar this week
Rory Percival, ex FCA technical specialist, will be publishing a study on the six most commonly used risk profiling tools, with an intended publication date of July.
At the Thesis Asset Management ‘In pursuit of Excellence’ seminar, Percival provided some preliminary findings from the report to an audience of financial advisers.
Referring to the FCA’s recently published Assessing Suitability Review report, Percival said that while the suitability results were positive the regulator had flagged that “a lot of poor practice still exists around disclosure”. The FCA reported that 41.7% of the cases reviewed providing ‘unacceptable disclosure’.
One of the areas that the regulator still has concerns around, Percival said, was risk profiling as referred to by COBS (i.e. Attitude to Risk), in particular how firms are using risk profiling tools in assessing the risk the client is willing and able to take.
While the regulator did not provide details around this in the report, Percival outlined his perception of what the regulator’s three main concerns are around Attitude to Risk:
1. That the results of the tools used are not aligned with the client’s answers to the risk questions. Where that happens, he said, advisers need to clarify the discrepancy with their client and make a record of that clarification.
2. Clients may answer in contradictory way. For example, the client might answer some questions that suggest low risk and others as high risk. “Again you need to clarify with the client and record it. Without that clarification it will not be clear what the clients attitude to risk is and you will not have demonstrated suitability of the case,” Percival advised.
3. Unclear categorising of the risk in the risk descriptions. Percival said: “Descriptions need to be sufficiently clear for the client to understand what the investment journey may look like. To do that it needs some kind of quantification – what will the ups and downs look like.”
Review of risk profiling tools
Percival said his report is looking at the six most commonly used tools and assessing them against Finalised Guidance 11/5, Assessing suitability: Establishing the risk a customer is willing and able to take and making a suitable investment selection. This was the document that said 9 out of 11 risk profiling tools “didn’t work very well”, Percival said. “I’ve turned that guidance into a series of test and I’m judging the tools against that guidance.”
Giving some insight into what he had found so far, Percival said it had soon become clear when he started to analyse the tools “that none of them are perfect”.
The first test he conducted was around the questions asked of the client. Regulator concerns here, he said, were that “some questions were over complex, assuming levels of knowledge and competence and certain levels of mathematical ability that clients may not have, which might make it difficult for the client to answer in a way that genuinely reflected their risk profile.”