Top 7 risk profiling issues

At this time of year, with Christmas fast approaching and New Year on the horizon, we like to gather our thoughts around issues we have seen and share these with our readers. It is a time when everyone does lists … shopping lists for food, Santa lists for gifts to buy and receive, and endless TV programmes on Channel 5 listing the top 100 this or that. So we have created a few lists that we will share before Christmas. We will start the ball rolling with our top risk profiling issues.

  • Capacity for loss (CFL)
    This is undoubtedly the aspect that is most often a problem. There appears to be a continuing widespread misunderstanding of CFL. Advisers and risk tools often treat ATR and CFL as the same thing!!!!! They are not. Click here to read what we have written about this before. 
  • Knowledge and experience (K&E)
    We regularly see cases where there is insufficient consideration of K&E. Sometimes this is not considered at all. Where it is considered, the client is often assessed as knowledgeable and experienced in investments because they once had a few quid in a cash ISA! We jest of course, that would be an extreme example. However, in practice, we do see that principle being applied, i.e. the client being assessed as having knowledge and experience on the basis of having a very small holding of shares, or an ISA or perhaps because the client has a workplace pension. This is not good enough. In the case of the shares it would be necessary to know when and how they were purchased, any loss made, whether they were sharesave etc. Merely having an investment does not automatically make the client an expert. And remember, if the client were truly knowledgeable and experienced, they would have less need to be consulting a financial adviser in the first place! A related issue is where the K&E tool indicates that the client has experience of some investment yet there is no such investment mentioned in the fact find. 
  • Attitude to risk (ATR)
    Not clarifying inconsistencies in the client’s responses or where a response clashes with other information about the client. Such inconsistencies should be discussed and challenged to clarify the position.

    Middle of the road responses – where the ATR tool is based around agree/disagree type questions, lots of ‘neither agree or disagree’ answers weakens the credibility of the conclusion. Again, the client should be challenged to ensure the answer truly reflects the client’s view.

    No consideration of the level of risk the client needs to take. For example, a client assessed as, say, 7/10 is indicating their volatility comfort level. But if the client’s objectives can be met without taking that degree of risk why would a lower risk solution not be considered? ATR is like a speed limit – it is a limit, not a target!

    Risk profiler questions which are not about ATR but which are included in the scoring matrix regardless.

    Last but not least, we often see risk profiling in annual reviews being handled very cursorily with little more than a note on file ‘ATR unchanged’!! While it is not necessary to actually repeat a full risk profiling process every year, it would be appropriate to evidence that there was at least a meaningful discussion.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

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Our View

Congratulations if none of the issues listed above rings true for you. You are probably doing risk profiling well.

Action Required By You

  • Review your risk profiling process against the issues listed here;
  • Make sure all advisers approach risk profiling in a consistent manner;
  • Contact ATEB if you would like to discuss your risk profiling process or have a look at the process we have designed specifically to address and remedy the problems that exist in some risk tools.
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About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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