Over 70% of advisers are using third-party risk profiling tools, but how they use these planning tools varies greatly from firm to firm, according to research carried out by Platforum at their recent roundtable for advisers in Harrogate.

Advisers found that nearly all their clients fitted into the centralised investment proposition (CIP).

“They [advisers] had directly matched their recommended model portfolios with clients’ scores on the risk profiling tools they used. So, for example, a score of 6 on a 1 to 10 risk from the risk profiler would mean that the client would be directly recommended model 6 on their range of risk-rated portfolios, said Platforum analyst Mariam Pourshoushtari.

“But other advisers insisted that the score on the risk profiler tool should just be the start of the discussion with the client, after which their risk score might well change – sometimes a lot. The conversation would probably still result in the client using one of the model portfolios, but only after a more in-depth process that took better account of such issues as capacity for loss. However, they did admit that this process could take a good deal more time,” she added.

A different approach

Martin Bamford, chartered financial planner (CFP) and managing director of Informed Choice, and founder and CEO of Bamford Media says: “Assessing attitude towards investment risk is well worth outsourcing to a third-party specialist. This assessment process needs to be backed up by rigorous academic research, which goes beyond the capability of adviser firms.

“We’ve been users of Dynamic Planner for several years, using their tool which is based on the latest research and psychometric thinking. Of course, assessing attitude towards investment risk is only a starting point. This process needs to be combined with a detailed understanding of capacity for risk and need for risk, which we establish during the Financial Planning process.

“I still remember my early years in financial services, when advisers would typically ask a series of basic questions and then make their own judgments about risk. Clients would typically end up in cautious or balanced managed fund, depending on this very basic process. We’re in a much better place today with access to these modern risk profiling tools.”

“Don’t blindly rely on risk-profiling tools”, says Ricky Chan, director and CFP at ifs wealth and pensions.

“I’m in the camp that advisers should not solely and blindly rely on risk-profiling tools. It should also involve discussion with the client (“Know Your Client”), the adviser’s judgement, and assessment of ‘Risk Need’ (if applicable) and ‘Capacity for Investment Loss’.

“The main issue with risk profiling tools is that they vary from provider to provider – i.e. the same client could be categorised differently depending on the tool used.  In addition, my understanding is that the financial conduct authority (FCA) has never mandated the use of a risk-profiling tool – though using one is a good start in the process as it is generally robust and repeatable, but it is just a tool at the end of the day. The adviser’s recommendations, based on all the other client information and facts, are equally, if not more important.

“To further exacerbate the issue, which isn’t touched on in Platforum discussion, is around mapping the risk profile to recommended asset allocations (i.e. the spread of investments). This again varies between risk profiling provider to provider, and some do not even give any guidance on it. Hence, there could be a range of possible outcomes for the same client.”