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Support of the guide
“We're pleased that Rory has acknowledged the tools he has assessed have all improved in the intervening years since FG11/5. We also agree with him that all risk profiling tools have limitations and support his sensible guidance on how advisers can go about mitigating those limitations. We have always stressed that a risk tolerance score that maps to risky assets in a client’s portfolio must be used as the starting point for discussion between advisers and their clients. We’re pleased Rory has reached the same conclusion. Without informed discussions about the risks associated with both psychological and financial needs the client quite simply can’t make an informed decision to invest. And if you don’t have informed consent, you’re likely to have trouble at some point down the line if the suitability of your investment advice is challenged.”
Mapping – Rory has unearthed a systemic risk
“FinaMetrica’s data shows that the risk score of the average client maps to a lower equity exposure compared to most other tests. We draw on more than one million tests, collected over almost twenty years, to map risk scores to portfolio equity exposures. The disparity in growth asset exposures that Rory has unearthed represents the systemic risk clients and advisers face if they use systems that are poorly calibrated. This exposes advisers and their clients to unnecessary compliance and investment risk.”
FG 11/5
“Although the regulator, or Rory for that matter, never named the two risk profiling tools that ‘passed’ the test in FG 11/5, we were always convinced that FinaMetrica was one. We’re even more certain of that now given the application of a similar test methodology. The visual ‘red, amber, green’ ratings in Rory’s guide illustrate the high-level conclusions. But the devil is in the detail in the excellent analysis. We would encourage everyone to read the words very carefully to get a clearer picture of the different hues of the amber ratings in particular.”
How might Rory improve the guide?
“The report concentrates, quite rightly, on certain limitations of the tools assessed. In that spirit, we’re sure Rory won’t mind us pointing out one of his own limitations. This is not an academic study. That point is made very clearly in the report. We believe the study could have been improved if the psychometric question sets were academically assessed, especially around the area of question interpretations. FinaMetrica is one of most established and academically reviewed risk profiling tools in the world. There have been many studies that have concluded our questions are unambiguous and manage conflicting answers appropriately. If Rory revisits this area in the future, we would encourage him to collaborate with experts in the field of psychometrics.”
Trust
“It's vital that the financial services industry is trusted. However, to be trusted, we must all act in a trustworthy manner. That’s the main driver for our collaboration with Rory on his report.”
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