Coutts’s recent warning to clients that it must check the suitability of portfolios pre-retail distribution review (RDR) serves as a stark reminder that the sector continues to grapple with this profound issue.
Many firms have sought to improve their systems, processes and audit trails by introducing risk-profiling and portfolio-monitoring tools, such as Bita Risk and Dynamic Planner. However, investment managers face a dilemma if the risk profiler suggests the client has a different risk profile to the one documented, or the underlying asset allocation needs to be adjusted.
In this situation, should you back your judgment and knowledge of the client by overriding the tool or adjust things accordingly?
Neil Shillito of SG Wealth Management uses Oxford Risk’s Research and Analysis system as a guide, but challenges its suggestions. ‘We use it as a good quantitative guide but we do not slavishly follow it. A good example is that many clients automatically come out on the cautious side. The way the questions are framed leads them to think, “Yes, this is the answer for me”,’ he said. He cited questions such as ‘How would you feel if your portfolio fell 30%?’, which inspired caution. For this reason, he said it was important to talk the client through their answers and apply a qualitative overlay.
For large firms with big legacy books, it is much harder to override the findings of a tool, however. One industry insider from a firm that is repapering a large legacy book told Wealth Manager that the time, resources and client communication associated with sidestepping the tool represented a big challenge for individual managers. It has put the brakes on new business, which he expects will ultimately dampen revenue growth.
Shillito believes this is down to having too many clients per manager. ‘These companies don’t have the time and resources to explain the nature of the questionnaire and what they are trying to give in terms of guidance.’
He takes the view that the Financial Conduct Authority does not necessarily want to encourage a reliance on these tools but rather engagement with the client when it comes to ascertaining their risk profile and capacity for loss. He suspects the meeting notes subsequent to the questionnaire are as important as the questionnaire itself.
Knadel management consultant Robert Hupe agrees. ‘However complicated it might be to override the tool, it should not preclude you from doing so if it is right for the client,’ he said. ‘It means you as an organisation need the processes, procedures and audit trail to document why any override has taken place.’
Consultant Mike Browning said much came down to the tool itself and whether it fitted a firm’s broader suitability process. Blindly applying a tool may not work if it hadn’t been designed or applied with knowledge from the front office, he suggested.
He added that the industry relied too heavily on such tools without appropriate oversight and monitoring.
Quilter Cheviot, meanwhile, is one firm that has opted not to introduce any tools, preferring to rely on face-to-face interactions with the client. ‘We considered using a risk-profiling system but rejected it as it does not give you any further protection in front of the regulator,’ director Jane Seymour said.
‘We don’t see it as a panacea or that we are off the hook on the suitability question. Responsibility lies with us.’