David Roberts questions why so many adviser firms rely on the standard ‘attitude-to-risk’ questionnaire which is increasingly turning into an outmoded tool, as he explains.
The debate over risk profiling, suitability and capacity for loss continues unabated and the regulator’s message remains consistent: investment advice must focus on investment suitability and capacity for loss. Suitability and capacity for loss remain a hot topic.
Despite all this, it appears to me that the use of attitude-to-risk (ATR) questionnaires remains almost as ingrained as ever. Why?
Many advisers remain committed to ATR tools yet, when asked for reasons why, the response is that they are merely a startingpoint for a more rounded discussion. If they are merely a starting point and, presumably offer little of value, why bother at all? The logic for ATR tools appears to me as flawed as travel agents asking a client their degree of fear of flying in order to advise on the most appropriate type of holiday and location, manner of travel and cost.
If fear of flying is irrelevant to holiday choice then attitude to risk is similarly the least important factor in advising clients on investment choices and strategy. So why make it the discussion starting point? It creates the perception that risk attitude is the most important criteria for investing. It is emphatically not.
The key to delivering sound financial advice is to concentrate on investors’ circumstances – not their attitude to risk. COBS9.2 of the FCA’s Handbook refers to the term risk profile just once. As every professional adviser knows, investment advice is about balancing anumber of investment objectives and constraints before arriving at a proposed investment strategy. Merely accepting an ATR score as a reliable means of determining investment advice is deeply flawed.
So what is the alternative?
Rather than an attitude-to-risk questionnaire that instigates an investment dialogue, a more grounded approach is a suitability questionnaire and process that concentrates on the things that really matter to investment advice:
- capacity for loss
- tolerance to fluctuations in investment
- liquidity needs
- income requirements
- investment timescales and horizons
- return expectations
- understanding of and sensitivity to inflation
- knowledge of financial matters and sophistication
- and yes, their understanding of and attitude to risk.
This multi-dimensional approach is a significantly better starting point for a discussion on investment than attitude-to-risk that is regarded by the adviser merely as a box-ticking exercise.
For many adviser firms the reason that they hang on to ATR questionnaires is a herd instinct perception that it satisfies regulatory compliance, not for reasons of good client service. If ATR tools offer so little, haven’t stemmed regulatory criticism and undermine client service perception, why hang on to such outmoded tools?