how to use risk-profiling tools

ADVISER KNOWHOW EPISODE 29 5 JUNE 2013 HOW TO USE RISK-PROFILING TOOLS

HOW TO USE RISK-PROFILING TOOLS

ADVISER KNOWHOW THE WEEKLY TV PROGRAMME FOR ADVISERS BY ADVISERS

The Financial Conduct Authority has highlighted the importance of accurately assessing a client’s attitude towards risk and capacity of loss as an integral piece of the advice process. Due to this, risk-profiling tools have been increasingly popular and advisers have taken on different tools to help evidence suitability.

As firms continue to work to perfect their proposition and investment processes, choosing the right tools can make all the difference.

1 How to choose the right risk-profiling tool.

2 Independent versus provider tools.

3 Points to remember when using risk-profiling tools.

KEY POINTS


KEY POINTS

KEY POINTS FOR THIS WEEK’S ADVISER KNOWHOW FEATURING AN INTERVIEW WITH MICHAEL BASI, MANAGING DIRECTOR OF BASI AND BASI FINANCIAL PLANNING:

1

2

3

HOW TO CHOOSE THE RIGHT RISK-PROFILING TOOL.

¬ Assess what you want to get out of the tool

¬ Compare a range of tools by their output

INDEPENDENT VERSUS PROVIDER TOOLS.

¬ Both can be beneficial but it depends on what the adviser wants to get out of it

¬ Independent tools are usually not aligned to a set of products, which can be a pitfall of using provider tools

POINTS TO REMEMBER WHEN USING RISK-PROFILING TOOLS.

¬ Many only assess investment risk and day-to-day, physiological risk should also be put into account

¬ Don’t depend on the tool’s results alone too much, especially as the regulator is looking for more evidence of suitability, not just a box-ticking exercise that leads to an investment recommendation

¬ They can often be prescriptive and backward looking

¬ They’re part of a conversation, not a conversation driver


PROGRAMME TRANSCRIPT

“When it comes to risk profiling tools, we would not use the tools offered by a life company. End of story”

Alan Dick, Forty Two Wealth Management

Welcome to Adviser KnowHow. This week we’ll be discussing how to use risk profiling tools. In the past, the regulator has highlighted the importance of accurately assessing clients’ willingness to take risks and capacity of loss as a cornerstone of suitability. Due to this, risk profiling tools have become increasingly popular. But how can advisers be sure that they are using the right tools and that they are using them correctly? Here with me now is Michael Basi, managing director of Basi and Basi Financial Planning to discuss this and how he has developed his own tools. Before we speak to Michael, let’s have a look at what other financial advisers have to say about the risk profiling tools that they choose to work with.

VOX POPS

Do you use risk profiling tools? Is so, which ones?

ANTHONY HOSKISSON, QuestaYes we do use risk profiling tools. The one that we use currently is the Oxford Research Risk Analysis one which is a company that is associated with Oxford University.

ALAN DICK, Forty Two Wealth ManagementWe use FinaMetrica, which, to my mind, is the best tool that we have discovered, and we have looked at a lot of them. We’ve also done quite a bit of work comparing the output from various tools and FinaMetrica seems to be the most

robust to our mind. But the reason we like that is that it is trying to assess risk only.

JARROD ELLIS, Delta FinanceYes we do. Primarily we use Skandia as our risk profiling tool.

Do you prefer independent tools over those offered by life companies and platforms?

Anthony HoskissonI think if you had asked me that question 12 months ago I would have agreed that they did have a benefit. Now I think that with RDR and the movements forward that there is no particular preference of whether it’s independent or one that is provided by a provider.

ALAN DickWhen it comes to risk profiling tools, we would not use the tools offered by a life company. End of story.

Jarrod ELLISIndependent tools can be better, although obviously we look behind both sets of tools, whether it be independent or from a life company and look at the outcomes that they’re providing.

What are the pitfalls of risk profiling tools?

Alan DICKThe big scare for me in regulatory terms is that we have to have a discussion that shows how we got from A to B. If

you put things into this big blender and something comes out the other end, I have no idea what happened in there. Anthony HOSKISSONI think that they are too prescriptive, and that without the additional conversation and discussion that we hold with the clients, they are not of great value really.

Jarrod ELLISI think you firstly have to be aware that the risk profiling tool is not the answer. It’s firstly just a step, in as far as having a conversation with the client about where they are looking to go. You also have to be aware of the limitations of a risk profiling tool, that, in effect, almost every tool will look backwards to use historical data to try and project forwards what is going to happen in the future.

END OF VOX POPS

MICHELLE ABREGO, New Model AdviserSo, how integral to your advice process are risk profiling tools? And what capabilities do you find that they need to have for them to be useful?

MICHAEL BASI, Basi and BasiWell, they are critical for us because it helps determine exactly what a client needs to be doing. We find that, for our risk profiling tools, a simple output of a number one to ten is effectively useless. We want a tool to be able to link that with a recommended asset allocation. We stress that we would recommend it,


because that’s just a guidance. And then from there we can have a discussion using our other risk profiling tools and work with our client onward from there. Michelle Abrego And you have mentioned in the past that you have built your own tools. Why did you feel the need to do that?

Michael Basi I think that there can be a temptation to overly rely on investment risk profiling tools. Now, for most clients we come across, that’s not their day-to-day concern. They don’t spend every waking minute thinking about, ‘how am I going to invest my money?’. So we wanted to have a tool that would help us to determine how much risk they are taking in their day-to-day lives. So we developed two additional profilers, one for self-employed individuals, and one for employed individuals, which helps them to make these distinctions between the levels of risk they are taking outside of finance. Then we can bring the two together.

Michelle Abrego And what pitfalls do you find in depending too much on risk profiling tools? Or just in the tools themselves?

Michael Basi I think that you can depend too much on the investment risk profiler, that’s for sure. I think that it’s very easy to just let a customer check all the boxes and say well, this is the asset allocation,

or even worse, this is the number and therefore I’m going to put them into a pre-packaged solution. That doesn’t, for us, really help elicit what the client really needs. So we use what we call our human capital risk profilers to help us to see what decisions they’ve made in their lives, in their employment and in the other decisions in their lives that they’ve had to make with their family. Then we look at the type of risk they’ve been taking in their lives and we say, ‘well, this is what’s come out from the investment risk profiler; this is what your life is telling us. If they match, that’s fantastic, let’s work on tweaking the asset allocation for you personally’. If they don’t, then that’s a subject for discussion and we’ll open it up from there.

Michelle Abrego Do you have any suggestions for what advisers can do to get the most out of their risk profiling tools?

Michael Basi I can only offer from my own experience. To get the most out of a risk profiling tool, it’s got to be part of a conversation. I think having a conversation, then fact find, then just shoving a risk profiler in somebody’s face and saying tick these boxes and we’ll go away and design your investment profile, I think it’s pot luck as to whether you’ll get exactly what the client needs or not. I think it’s got to be part of an ongoing conversation and I think the majority of excellent financial advisers in the country are doing that

and I think that’s what it’s got to be. It’s got to be a conversation about what the client actually wants and needs, rather than an output of a form. Michelle Abrego Well, thank you very much for your time Michael.

Michael Basi My pleasure.

Michelle Abrego You can download the cribsheet for this week’s edition at citywire.co.uk/adviserknowhow or bnymellonam.co.uk/adviserknowhow.

Or you can find the link and add your views at @AdviserKnowHow on Twitter.

“I think you firstly have to be aware that the risk profiling tool is not the answer. It’s firstly just a step”

Jarrod Ellis, Delta Finance


Produced in association with BNY Mellon, Adviser KnowHow is a new groundbreaking programme, created specifically to help you and your business. Every week we speak directly to your peers in the industry to understand how they have addressed some of the key issues that advisers face every day of their working lives.

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