Response to Advisers fear challenging client's attitude to risk

In response to the FT Adviser article; 'Advisers fear challenging client's attitude to risk', there should be little concern about punishment from the regulators as long as the adviser completes, or refreshes, a recent risk profiling process each time their clients want to invest.

Gillan Williams
Author Gillan Williams
Date 2nd June 2017

FE's research seems to indicate that there is a clear disparity between the level of risk some investors are willing to take and the goals they hope to achieve. This certainly puts the adviser in a difficult position. They want to help their clients achieve the returns they desire, but they also need to exercise caution, responsibility and adhere to the regulator's guidelines.

You can read the original article here.

Essentially this is a matter of suitability, the balance of providing options that are suitable to the client's risk tolerance profile, investment goal and time horizon. However, the focus seems to be on advisers being ‘reluctant to increase the risk tolerance because they fear a regulatory comeback.’, As the risk tolerance of the investor should not be altered on a case by case basis, but rather it is a relatively static measure that informs of their general willingness to take risk in comparison to others. As such, risk tolerance must act as an input into any suitability considerations, but not a ceiling or floor. If an investor reveals an investment need or goal that exceeds the level of risk generally recommended for their risk tolerance, the risk profiling process must address if this increased risk can still be justified for that investor. Assessing their risk capacity, the importance of the goal, the flexibility of the target, and other specific aspects of the investor’s circumstances will be necessary to deem whether or not the heightened risk can be suitable for that investor.

Without this expanded consideration of the investor’s risk profile, going beyond their risk tolerance, it would be difficult to establish a process that can justify more aggressive investment strategies. More risk may not commonly be a suitable option, but for some investors the standard investment options that are suitable for their risk tolerance, without considering other factors, simply will not reach the desired goal within the specified time horizon.

We would strongly advise that the adviser does not move the client into a higher risk category if the output of the assessment does not suggest it, or without performing a risk profile. This could lead to simplified but inaccurate risk profiles, where risk tolerance does act as a floor or ceiling to the risk that can be taken. Using risk tolerance on its own will never be sufficient to provide suitable advice, and hence risk tolerance must act as a consistent input into a more thorough process, rather than it’s only consideration.

This is a good example of how a risk tolerance assessment should not be a replacement for a discussion with the investor. The best scenario is when they are used together.

It is our aim to assist adviser in providing suitable investment advice, to help their clients achieve their investment goals whilst ensuring suitability and industry compliance.

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