Risk profiling essential to meet best interest duty
Ensuring standardised practices for establishing a clients’ risk profile is crucial to meet best interest duty, according to Oxford Risk.
The UK-based behavioural finance firm was launching into Australia as it said it expected suitability and best interest duty to come under greater scrutiny in light of the Royal Commission.
There had already been a regulatory reform in the UK called the Retail Distribution Review (RDR), which was similar to the Royal Commission, and this had led to an “tightening up” on how advisers established risk capacity and risk tolerance.
The problem, however, was the lack of clear standardised process by advisers to establish a client’s risk profile as many were only looking at one part of a client profile such as their risk tolerance or how much the client wanted to achieve in returns.
“We have done studies where we give a case study to 200 advisers and everyone came back with a different equity allocation for that client, the variation in answers is enormous,” Greg Davies, head of behavioural finance at Oxford Risk, said.
“It varies between 0% equity to 100% equity for the same client as each adviser is putting the information together in different ways. That was a problem exposed by RDR but we are seeing the same issues worldwide.
“There is a huge challenge of advisers putting the answer together in different ways which is an inconsistent way to measure risk. They can’t just make up their own questionnaires or only focus on one part of risk tolerance.”
However, he said even with a standardised process, it could only go some way to solving the problem as it was “human-led”.
This had been highlighted with the COVID-19 pandemic as every client found their financial circumstances changed quickly, whether that was from being unable to work, increased household savings or receiving Government stimulus. Advisers subsequently found it hard to change their portfolios quickly enough to meet the change in risk capacity.
Bianca Kent, head of client and strategy at Oxford Risk, who was based in Sydney, highlighted behavioural finance was becoming a wider part of advisers’ education and was included in the Financial Adviser Standards and Ethics Authority (FASEA) exam. However, advisers were often unsure of how it could be applied with their own clients.
The Oxford Risk risk-profiling was broken down into three parts: client profiling which looked at cashflow goals and financial personality, matching the client into relevant products, and guiding investors on their financial journey. It also included a personality assessment and fact-find and had the option to include questions of environmental, social and governance (ESG).
AUTHOR
Laura Dew
Recommended for you
Sharing his reasoning in joining the FSC board, WT Financial managing director, Keith Cullen, believes “product and advice cannot be separated” from each other in the current environment.
The Emerge Foundation, a charity run by financial advisers and fund managers, has announced a scholarship program to help veterans transition into tertiary education.
In an open letter, Sequoia chief executive Garry Crole has hit out against shareholders “with a personal axe to grind” as he fights for his job ahead of an EGM.
The JAWG has announced it is in talks with Treasury around five “core principles” to strengthen the education standards for new entrants to the financial advice space.
