However, by 2017 things had improved, with former FCA technical specialist Rory Percival at the time producing a report that noted: “[Risk profiling tools] have evolved quite noticeably since the FSA did its work at the beginning of the decade.
"At the time, it tended to be just standalone risk profiling tools, but now they are much more integrated.”
However, there still seems to be room for improvement. For instance, some advisers are wary of the ultimate accuracy of risk-profiling algorithms in how they capture individual circumstances.
“Many risk profiling tools assume an individual's ‘risk tolerance’ is fixed and invariable,” says Amyr Rocha-Lima, partner at Holland Hahn & Wills.
“I’d argue it rises and falls with the prevailing market trend.
"Financial planners know that the same client will give you wildly different estimates of their ability to withstand ‘risk’ at different times. The danger lies in accepting an investor's own estimate of their ‘risk tolerance’ as it will usually be an unconscious call on the current market.”
The regulator is also wary, writing a ‘dear CEO’ letter to the advice industry in January 2020. Among the issues highlighted was suitability of advice, which has forced providers to refocus their offerings.
SimplyBiz is one such provider, with a new service to be rolled out in 2020 responding to concerns about how risk profiling works for retirement plans.
Dan Russell, managing director of SimplyBiz Investment Services, explains: “It’s noticeable the majority of financial planning tools and risk profiling processes are entirely based on long-term growth assumptions and these are not necessarily a model you would use if you were taking an income in retirement.
“We will shortly be revealing retirement-income optimised planning processes and asset allocations that allow advisers to specifically choose a retirement-income optimised approach with very different concepts of risk, where sequencing of returns and coverage ratio are much more significant than long-term volatility.”
Paul Resnik, co-founder of Finametrica, bought by Morningstar earlier this year, also sees room for improvement and is concerned risk profiling is being used to sell products rather than strengthen service.
“You want to construct a proposition where the client can make an informed decision, you cannot just use the algorithm to give advice,” he says, adding he has had poor experience working with larger advice organisations with “mechanical and commoditised” DFM propositions.
Mr Resnik elaborates: “As you go up to institutional advice, it tends to become more mechanical. My experience is they look at my 25-question test and say no clients will want to fill that in.
“My response would be it will be the basis of the relationship and strengthen their understanding of the advice needs.”
