Advisers are increasingly making use of third-party risk profiling tools, with over 70% of adviser firms now telling us at Platforum that they use them. But how they use these planning tools varies greatly from firm to firm, as we found in Harrogate at our most recent adviser roundtable, where they all used third-party risk profilers.
Some of the advisers told us that nearly all their clients fitted into the centralised investment proposition. They 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.
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.
The attendees recognised that risk profiling tools have come under regulatory scrutiny in the past because of concerns with shoehorning. They felt that their own judgment was often of greater value than the result of tools – particularly around capacity for loss, where current questionnaire-based tools were regarded as insufficient. However, there was concern that deviating from the result of a tool could be perceived negatively in the event of a client complaint. We think that these fears are misplaced and hope that the regulator and ombudsman would agree.
Our series of roundtables have shown us how adviser firms’ centralised investment propositions keep evolving. We are seeing a trend towards more outsourcing – not just in investment solutions – but in elements of the investment process like risk profiling. We think advisers should use them selectively.