As Financial Planners and Wealth Managers, we take our role in managing risk for clients very seriously.

After all, we talk about the small (but very big) word TRUST all the time when we examine why a client will choose to put their faith, and money, with us.

Of course, risk is ever more topical at the moment what with the terrible tragedy of the earthquake in Japan, the Libya conflict and massive unrest in many Arab countries. Events like these affect confidence which in turn affects stock markets.

So we were interested to see the Financial Services Authority (FSA) revisit this subject recently, and the many discussions taking place in the financial trade press.

One such trade journal, New Model Adviser (NMA), was launched in 2006 to reflect the growing number (although still small) of commission based advisers becoming fee based planners.

The NMA states that the Financial Services Authority (FSA) has warned of some financial advisers’:

• failure to account for clients capacity for loss
• over-reliance on and poorly worded risk questionnaires
• unwillingness to place client money in cash accounts which can lead to inadequate assessment of client risk
• failure to take sufficient account of the client’s other needs, objectives and circumstances such as paying off debt

Furthermore, the FSA said it had seen examples of firms failing to have a robust process in place to identify a client’s real needs, and that it had concerns that risk profiling tools had “limitations, which means there are circumstances in which they may produce flawed results”.

The FSA said risk questionnaires used by advisers were often not clearly worded, and that the number of questions asked varied widely.

“We have seen cases where the resulting risk category is effectively determined by the answer to ONE question”.

The regulator also singled out for criticism the use of words like ‘some,’ ‘reasonable’ and ‘moderate’ to describe attitudes to risk.

It said it was also concerned that a number of advisers used vague labels to explain risk to clients, such as categorising risk tolerance on a scale of 1 to 10. “This was a problem because the risk represented by each number was subjective”.

The FSA also said some advisers were relying too heavily on information from a product provider when researching the suitability of an investment. “There were gaps in the provider’s information and as a result the firm failed to understand the nature of the risks of the product which led the firm to inappropriately rate the product as lower risk”.

The FSA also reviewed 11 risk profiling tools and found 9 had weaknesses which could have led to flawed results. “Firms must not rely on the findings of risk profiling tools without understanding the assumptions used by the system”, stated the FSA.

“We are also concerned that our findings suggest many firms do not understand how the tools they use work, including what they are (and are not) designed to do. Firms should only use a tool where they are satisfied that it provides outputs that are appropriate and fit for purpose”, said the report.

What It Means To You

Many financial advisers and planners have worked hard over the last few years to improve their standards and the service they offer to their clients.

Unfortunately there is still a number who are satisfied to do the minimum, as long as they achieve the sale of the product/policy.

So in our opinion, there are still too many salespeople out there and not enough advisers and planners who advise properly.

One of the bugbears here is of course commission. If you need to sell a product to earn a living and you only have a hammer, everything looks like a nail!

For those of you reading this who are not clients of ours, does any of the above sound familiar? Are you comfortable with the investments you have, and why you have them? What risk levels are you taking, and why?

So, if you do use the services of a financial adviser/planner but are perhaps not certain what you’re getting for your money (and yes, if you do pay via commission the advice/service is NOT free!), we recommend that you shop around for an adviser/company that:

• compiles you a (written) strategy based on your goals and timescale that covers what to do with debt, cash and serious longer term investments (if any) and why
• asks you to complete a rigorous risk assessment (questionnaire)
• (the one we use, Finametrica, has 25 questions)
• is able to inform you on an ongoing basis how much of your money is invested in cash, bonds, property, equities, etc
• conducts a ‘stress test’ that mimics what would happen to your money (in pounds) in a very volatile stock market – could you tolerate it if you were to lose thousands of pounds? (and how would that affect your long term financial plan?)
• examines your financial roadmap, which compares your assets to measured needs – does the portfolio chosen at the predicted rate of return mean that you are on target to achieve your goals in life (now and in the future?)
• if your roadmap looks very healthy, suggests to you to reduce risk further by choosing a different portfolio with a lower level of risk that still allows you to succeed

You probably won’t be surprised to learn that we cover all the above points. The whole point of the process is to do the best we can to get you from where you are, to where you want to be, with the minimum amount of risk.

The Financial Tips Bottom Line

Clients often tell us that the most valuable thing for them to have is peace of mind. In our experience this is achieved by having a strategy which involves not taking risks that you don’t need to take, and being in control.

ACTION POINT

If you are unsure of your investments and the risks attached, make sure you check this yourself or your adviser covers this with you in detail.

Where is your money invested and why?

What is the volatility (standard deviation) on these?

Can you reduce risk, and if so how?

Seize the opportunity and take action, don’t put it off!