Suddenly, at the start of 2017, there is a 'buzz' around investment suitability and risk tolerance profiling. That is welcome, encouraging and surprising!

It's surprising on two fronts. First, that it's happening at all. I've been talking about suitability for a long time now, but often to blank stares. So it's great to see investment suitability trending as a topic now. The second surprise is this all happened over the December - January period, when it's usually pretty quiet!

What does it mean? I think it signifies the beginnings of a new consensus that says investment suitability and risk tolerance profiling are serious issues which can no longer be overlooked or ignored. In the US, I believe that 'fiduciary' will become the default standard for advisors by the end of 2017 - regardless of what President Trump does or doesn’t do to the DOL rules.

I am mindful of Aristotle's caution that 'one swallow does not a summer make', however I'm fairly sure that I am seeing a flock of swallows! The articles I am discussing here completely align with my recent experiences in London, India and Hong Kong where - for reasons I can't completely explain - the previously blank stares have been replaced by inquisitive, questioning faces.

I can see three causes:

1. Fear of another crash. People remember the pain of 2008 and we know that another crash will come.
2. Robo-advice has highlighted a problem. Algorithms need science, but regulations are vague platitudes. So uncomfortable questions are being asked.
3. Discussion about the DOL rules in the US are changing investor expectations. Clients are expecting advisors to 'do the right thing' and put their interests first.

Investment suitability is a 'thing' in 2017. It's time to get ready.

What is investment suitability?

In simple terms, investment suitability means that investments meet the needs of the client. There are three questions that need to be dealt with:

1. Does the asset allocation meet the investor's psychological preference for risk?
2. Will it provide liquidity to meet liabilities?
3. Will the allocation provide still provide suitable funds to meet liabilities during or after times of volatility?

Suitability - and financial planning - is inevitably a 'trade-off' between psychological and financial considerations.

Robo-advice must become goals-based
This article eloquently argues that robo-advice must avoid becoming product-centric and 'learn' to focus on the client's goals, by building better advice tools and processes. FinaMetrica is currently involved in a number of integrations to help robos meet the same standards as human advice.

Ontario Securities Commission roundtable on risk profiling
Canada continues to lead with the world by recognising that risk profiling is a complex, multi-dimensional process that combines subjective and objective factors. The roundtable event was an opportunity to obtain stakeholder input, with considerable common ground emerging.

Hong Kong's regulation among the most detailed I've seen
Most regulators are quite vague about risk tolerance and investment suitability, which makes the latest circulars on suitability from Hong Kong's regulator really stand out! The circulars and updates from the Securities & Futures Commission (SFC) are among the better reasoned and comprehensive documents that I have seen from regulators anywhere.

Risk tolerance is not risk capacity (and vice-versa)

Many people confuse risk tolerance (a psychological trait) with risk capacity (a financial measure). Many people combine the two measures in one assessment, which commentator Michael Kitces correctly argues is a fatal flaw in design.

Being a 'Fiduciary' is becoming easier thanks to new tools
It's easier to swim with the tide than against it and right now the tide is running toward fiduciary, with a host of new tools available to advisors to prove they are meeting the required processes and standards. Industry expert Bob Veres reviews a range of the new tools in this article.