Ex-FCA technical specialist Rory Percival, writing exclusively for issue 4 of Financial Planning Today magazine, said that many problems surrounding risk profiling found by the FSA six years ago still exist.
Read his article in full here.
He urged planners to look again at the FSA report, some of the key findings from which, are below.
Mr Percival said he continued to see examples of risk descriptions which failed to quantify the level of risk involved and only had vague details.
He said: “This (risk profiling) is a critical area for firms to get right so firms should be clear about the pros and cons of the tool they are using and ensure they are using it in the right way to help – not replace – this part of the advice process.”
On risk profile tools, he also warned that some “have questions purportedly about capacity for loss but don’t get to the heart of the issue in practice”.
At a recent event, Mr Percival said some advisory firms are failing to adequately assess clients’ capacity for loss - a key element in risk profiling.
Speaking at the first DFM Due Diligence seminar in the City, run by online DFM forum Discus and in association with Financial Planning Today, he said this aspect of the advice process has “become really important” and that “there are still problems with some ”risk profiling tools.
In 2011, the FSA said the “level of failure in this area is unacceptable.”
The FSA said half of the investment files it assessed as unsuitable between March 2008 and September 2010, were rated as such on the grounds that the investment selection failed to meet the risk a customer is willing and able to take.
Key points from FSA finalised guidance on assessing suitability in paper FG11/5:
Relying on risk-profiling and asset-allocation tools
FSA: “Tools can usefully aid discussions with customers, by helping to provide structure and promote consistency.
“But they often have limitations which mean there are circumstances in which they may produce flawed results.
“Where firms rely on tools they need to ensure they are actively mitigating any limitations through the suitability assessment and ‘know your customer’ process.”
FSA reviewed 11 risk-profiling tools and “were concerned to find that nine tools had weaknesses which could, in certain circumstances, lead to flawed outputs”.
The FSA stated its concern that findings suggested many firms failed to understand how the tools they use work, including what they are designed to do.
Failure to collect and properly account for all the information relevant to assessing the risk a customer is willing and able to take
FSA: “Although most advisers and investment managers consider a customer’s attitude to risk when assessing suitability, many fail to take appropriate account of their capacity for loss.
“Where firms use a questionnaire to collect information from customers, we are concerned that these often use poor question and answer options, have over-sensitive scoring or attribute inappropriate weighting to answers.
“Such flaws can result in inappropriate conflation or interpretation of customer responses.
“We have seen examples of firms failing to have a robust process to identify customers that are best suited to placing their money in cash deposits because they are unwilling or unable to accept the risk of loss of capital.”