5 min read 20 May 20
The information contained in this page is for professional Financial Adviser use only.
The FCA’s current suitability review has a clear focus on retirement advice and, while we don’t yet know what exact aspects the regulator will focus in on as part of its review, the use of risk profiling tools is likely to come up.
Risk profiling has become an integral part of the advice process for the majority of firms and many will use it with all clients, regardless of whether they’re in accumulation or drawing down income. However, risk profiling can become trickier in the context of retirement advice, as a client’s lifestyle factors, financial needs and risks can change significantly and become more complex when they hit retirement.
And with MiFID II having strengthened the responsibilities of advisers in this area, now feels like a particularly important time to recap the key issues you may need to think about.
Most advisers will use tools to help support their advice process, whether it’s risk profiling, wrapper selection or cashflow modelling. In almost all cases these tools support, instead of replace, the need for human advice, and as a result it’s important to understand the scope and limitations of the tools and be able to mitigate against any weaknesses within the wider advice process.
Some of the regulatory requirements in this respect have existed for a number of years already, having been issued originally by the FSA. But then MiFID II came along and placed responsibilities on advisers to take reasonable steps to ensure the information collected about their clients is reliable. This includes (but is not limited to):
“ensuring all tools, such as risk assessment profiling tools or tools to assess a client’s knowledge and experience, employed in the suitability assessment process are fit-for-purpose and are appropriately designed for use with their clients, with any limitations identified and actively mitigated through the suitability assessment process;” 
It's also worth looking further back at the final guidance published in 2011 by The FSA (as it was then) on the use of risk profiling tools, FG 11/05 Assessing Suitability because the guidance very much still stands. There are four main issues that advisers need to be aware of and act on if necessary:
As well as the individual issues above, advisers should also think about the end to end process. If you are using a risk profiling tool and asset allocation model developed by different third parties, how do the input and outputs match together? And how robust is the mapping process?
If you want to make sure your risk profiling is up to scratch, you probably can’t go wrong with sticking to the following suggestions from the FCA on the areas for advisers to review when reassessing their risk profiling process:
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The information contained in this page is for professional Financial Adviser use only. If you are a private investor, please visit the Private Investor section or contact your Financial Adviser for more information.