Fresh warning over adviser reliance on risk tools – Research company report on Skandia range cautions against sole use of provider tools one year after FSA paper highlights issue.
Research agency Rayner Spencer Mills this morning (16 April) issued a report that warns advisers against an over reliance on risk profiling tools in order to determine clients’ attitude to risk, following a review of Skandia’s Spectrum Fund range.
The report states intermediaries need to do more than just employ the tools provided by investment firms such as Skandia in terms understanding better the investments upon which they advise.
RSM’s warning a little more than a year after the Financial Services Authority issued a final guidance paper on risk profiling tools that said advisers place too much focus on the use of software tools to assess the risk capacity of clients, resulting in
- “unacceptable” failures and a “high number of unsuitable investment selections”.
The regulator assessed 11 tools for the paper and said that nine “had features that meant that there was a high probability that, under certain circumstances, the output might not accurately reflect the risk that a customer is willing to take”.
RSM’s 28-page report highlights
- “resource issues” for many advisers with risk assessment and product research, due to a need to maintain a “logical and well supported audit trail” at a time when “the complexity of financial solutions in the retail market [is] increasing”.
The report goes on to say that while this is inevitably leading to a greater incidence of outsourcing to managed funds and risk-rated funds such as the Spectrum range, regulatory scrutiny will mean that “advisers will not be allowed to hide behind the tools they use”.
It says:
- “The need to keep up to date with this changing climate and to help manage clients’ overall portfolios has seen an increase in outsourcing this part of the business. The effect of this can be seen by the inflows into managed sector funds over the last few years.
- “We have to accept that determining client attitude to risk is and will continue to be scrutinised as part of our regulatory regime and, as such, advisers… must be able to justify the outcomes and the resulting investment advice.”
The report was broadly positive on the spectrum range, saying that
- “establishing the correct client risk attitude and profile has been identified as a weakness for a number of systems… and therefore the Spectrum funds focus on this risk aspect in the running of the portfolios”.
Choosing the best fund management company Aberdeen adds ‘rising star’ Hudson to funds John Ventre, manager of Skandia Spectrum funds, said:
- “Risk tools play an important role in helping to ensure that customers invest in a solution which is suitable for them, so they are an important part of a good advice process but not a replacement.”
Asserting potential confusion between ‘risk-rated’ and ‘risk-targeted’ funds, with the Spectrum range being presented as examples of the latter,
Mr Ventre highlighted a “significant difference” between
- “rating something for risk” and
- managing investments “to meet [clients’] risk expectations”.
He said the latter option allows clients
- to be “truly integrated with risk tools and the financial advice process, so helping deliver a complete investment solution”.
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