The use of third-party risk profiling tools continues to be widespread, with nearly 80% of financial advisers telling us at that they use a risk profiling tool from a third-party provider. But many advisers seem to be reducing their reliance on these tools to build investment solutions, as we have heard from advisers attending our recent series of virtual roundtables discussing their investment propositions.
Firms are increasingly more relaxed about how their advisers arrive at these risk profile scores, and third-party risk profiling tools are just being used to measure risk tolerance rather than arrive at the total score.
Capacity for loss is also a key factor which can conflict with the risk tolerance assessment. Many advisers say that the tools can’t handle this and that questionnaires are generally too simplistic.
Cash flow modelling to help assess a client’s capacity for loss is becoming more popular. This is then followed by detailed discussions with the client to try to produce an overall score, although there are few formal methodologies for reconciling these factors. There also still seems to be confusion among some advisers about what capacity for loss really is.
Where a client has ESG concerns, most advisers report that incorporating ESG factors into their risk profiling process also requires an in-depth conversation. Advisers need to explain their firm’s approach to ESG investing and also to help clients understand the risk implications of choosing the ESG investment solutions on offer.
Third-party risk profiling tools and the automatic asset allocation functions have helped adviser firms build and monitor risk-targeted investment solutions. Now adviser firms want and need to refine processes – and third-party tool providers need to rise to the challenge.
We’re publishing our UK Financial Advisers: Investment Propositions report next week. More information about our UK Financial Advisers research can be found here.