A staple of the financial planning process is deciding on the appropriate risk level to which to invest your client’s money. With the majority of firms relying on the variety of tools available, there is no 'perfect' solution… or is there?
Over the years, I’ve experienced using many different tools and I’ve put together my top three things to think about when considering how you assess and decide on a suitable risk profile for your clients.
1. To tool or not to tool?
One of the great misconceptions is that firms have to use a risk profiling tool, however this is not the case.
The FCA have issued clear guidance on good and bad practice looks like in this area and what is required is clear and simple risk descriptions.
All tools will provide an output with a description, however these can be long and jargony which can mean the client is less likely to digest it. Using a tool can also, without good internal training and guidance, be used as the single determinant of the appropriate risk profile, where it should only ever be a starting point for a discussion.
2. Less profile and more process
Whether you use a tool or not, the most important thing is to have a documented process that details the client journey from prospect to onboarding to presentation and ongoing service.
You might think this goes without saying, and we all have our process written down. However, often the risk profiling part is detailed simply as 'agree a suitable client risk profile'.
For an experienced financial planner, they, like me, will have learnt how to best determine a suitable risk profile for a client however in larger firms or for trainee financial planners having a consistent repeatable process is the key to providing suitable advice and making risk profiling a slick part of the process.
3. Covering all the bases
Although many of the tools and systems we use have some prompts to guide us, as part of the risk profiling process there are certain things that must be documented for the file and are easily missed if not included in the process.
The basic questions that need to be covered are:
- Does the client need to take risk?
- Can the client afford to take risk?
- How long will their money be invested for?
Although these must be included with the file, there is no requirement to replay everything in your client-facing documents. However, these can help to create a more compliant file as well as client-facing documents that can be more easily digested by clients.