Former FCA specialist’s report to show “significant and material differences in asset allocation” for the same client
A major new report due to be published next week will highlight significant concerns about six of the largest risk profiling tools used by advisers.
The report compiled by former regulator Rory Percival is the first major review of risk profiling tools since 2011.
At the time, then-regulator the FSA found serious failings with nine out of the 11 tools it assessed.
Percival – now an independent consultant – says a review of these risk profiling tools was overdue, particularly with the forthcoming introduction of the EU’s Mifid II rules.
While the report finds that that risk-profiling technology has improved and evolved significantly since 2011, it highlights concerns about how these tools can each come to very different portfolio recommendations for the same client.
Percival says: “We are talking about significant and material differences in asset allocation. This isn’t about marginal differences in percentages, it’s about ending up with a different investment portfolio.”
The six risk profiling tools assessed are A2Risk, EValue, Dynamic Planner, FinaMetrica, Morningstar and Oxford Risk. These companies also provide risk profiling service through other third-party brands, for example Iress and Defaqto.
The report does not score, or rate the individual risk-profiling companies, however.
Percival says: “For each provider there is a section highlighting the particular limitations of the tool, and suggesting ways that advisers can mitigate these limitations in the advice process.”
The report will highlight specific cases where the tools differ in their recommendations.
Percival adds: “Advisers shouldn’t solely rely on the outcome of the tools, and assume the job done.
“Under MifidII, advisers must review these assessments and ensure they are fit for purpose. Part of our aim in producing this report is to help advisers determine whether an assessment or recommended portfolio is fit for purpose. It should also enable advisers to identify and mitigate potential risks when using these tools.”
Percival said that there were limitations in any risk-profiling tool, but the report did not find any one provider was significantly better than another.