Risk has never been such a big issue for financial advisers. Advisers are becoming experts in risk management as they run businesses within an ever increasing regulatory environment. On a different level, the assessment of client risk and identification of suitable investment propositions can also be a challenge.
I met recently with Rebecca Warren, Head of Marketing at FE, where we had a good discussion about some recent research they have undertaken on the topic of risk. FE’s research report highlights best practice and areas where advisers could make improvements to avoid exposing themselves and their firms to business risk and regulatory action.
The key headlines from the research are as follows:
» Mapping risk outputs to suitable investment options is one of the biggest potential risk to advisers’ investment processes. Advisers are not being scientific in mapping attitude to risk questionnaire outputs to the investments being placed within portfolios.
» The number of advisers never using risk profilers is actually rising, with 44% never using them in the 2018 data compared to 31% in the previous survey.
» The number of advisers putting clients’ assets into a single solution has reduced with 31% of advisers saying they intend over the next 12 months to put 90% or more of their clients in a single investment proposition down from 40% two years ago.
» Advisers are increasingly turning to the sub-optimal practice of blending or combining their clients’ assets across more than one model portfolio or multi-asset fund. 73% sometimes engaging in the practice in this year’s survey, up from a figure of 64% in the 2016 survey and 71% in 2017.
» Firms are failing to monitor recommendations from Attitude to risk questionnaires (ATRQs) into portfolios at an aggregate firm level.
» There is a potentially concerning increase in the number of advisers not using risk targets when building a portfolio, with 44% saying they never do, compared to 31% a year ago. However this may reflect increased use of outsourced solutions.
» More than half (54%) of advisers have not adapted their investment process over the last two years.
» 90% of the firms surveyed are carrying out reviews on all aspects of their investment proposition at least annually, with 39% doing so twice a year
» 21% of advisers canvassed say they may launch a robo adviser proposition over the next two years, with 13% definitely intending to do so. That compares with 32% and 11% in 2016 and 2017 respectively.
» A lack of integration between systems is advisers’ top frustration with their current investment process, indicating a reliance on technology and external tools to run their investment propositions and save time.
» Just 53% of advisers have reviewed their ATRQ in the last 12 months.
In amongst all the data, there were a number of surprises in the research findings.
- Adviser models: Whilst there is a belief in the market that advisers are increasingly outsourcing their investment proposition to third parties and in particular Discretionary fund managers, 59% of those surveyed are still using in-house model portfolios which is only marginally down on the figure for last year at 60%.
However, whilst 79% of firms have an investment committee, that presumably selects funds for these models, very few have CFA level qualified staff on this.
- ‘Shoehorning’: This was a termed coined by the FCA in their 2012 paper on Centralised Investment Processes whereby they raised a concern that clients were put into a ‘one size fits all’ investment solution.
The research indicated that 31% of advisers intend to put nearly all (90%) of their clients’ investments in a single investment proposition which points to not only concentration risk but also potential ‘shoe-horning’ and could be a negative side effect of Centralised Investment propositions.
- Labels for model portfolios: The recent Investment Platforms Market Study, Interim Report identified challenges with the labelling of portfolios and therefore the comparison methods used by financial advisers. Model portfolios can expose investors to very different underlying assets and volatility in returns. Different labels are applied to explain the risk categories for example, ‘Cautious’, ‘Balanced’, ‘Low Risk’, ‘Adventurous’ and ‘Aggressive’ which are highly subjective and is why the underlying data and risk profile of the portfolio should always be queried via a tool such as FE Transmission. The Compare tool on the DISCUS website can help financial advisers to identify whether a model portfolio solution is available on FE Transmission.
The research by FE supported the concern that the mapping of risk assessment to investment solutions is a challenge. 50% of advisers agreed that their third party risk mapping tool has limitations describing them as ‘simplistic and too generic’ and 67% of the advisers surveyed don’t review the underlying methodology of those tools themselves.
The research paper covers a wide range of topics and I plan to take a deeper dive into some of the findings in a follow up article. Please drop me a note if there are any specific areas you would like us to explore further.
This article was created for the DISCUS website following a DISCUSsion with Rebecca Warren, Head of Marketing at FE. You can learn more about FE on their website.