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Risk, Risk Profiling and Risk Tolerance.

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Investment suitability hits the mainstream

Paul Resnik - Friday, 10 February 2017

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in London, India and Hong Kong where - for reasons I can't completely explain - the previously blank stares have been replaced by inquisitive, questioning faces.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.

Posted: 10/02/2017 10:18:30 AM by Paul Resnik | with 0 comments

FinaMetrica maps to Royal London Portfolios

Paul Resnik - Tuesday, 22 November 2016

Royal London are pleased to announce that their nine Governed Portfolios and five Governed Retirement Income Portfolios have been mapped to the FinaMetrica risk tolerance scores. .

The Governed Portfolios are a range of off-the-shelf investment solutions built for customers looking to save into a pension. There are nine risk graded portfolios; all come with regular governance reviews and auto rebalancing at no extra charge. You can also change the default equity fund to any available within our range.

The Governed Retirement Income Portfolios (GRIPs) are specifically designed for customers who are looking to take a regular income. They are available through Pension Portfolio Income Release, or for workplace pensions, through their award winning Target Lifestyle Strategies which target drawdown. They come with the same expert governance and automatic updates that the Governed Portfolios benefit from to help keep the portfolios on track.

Posted: 22/11/2016 1:54:02 PM by Paul Resnik | with 0 comments

Financial Services Watchtower Report

Paul Resnik - Tuesday, 26 July 2016

Outside in the distance, a wild cat did growl
Two riders were approaching, the wind began to howl

All along the watchtower - Bob Dylan (1968

Even though there's no overt threat, there's an ominous feeling of disquiet in Bob Dylan's 'All along the watchtower'. Something's clearly not right about the world. There's an undercurrent of danger. You just can't be sure what it is.

Across the globe, financial services businesses are living out a similar fear and unrest. In my 45 year career I've never felt so much uncertainty and anxiety about what's to come.

I saw it constantly in the USA, UK, Europe and Asia over the past seven weeks. I presented and talked with representatives of investment managers, life companies, banks, advisors, financial planning software companies and robo-advice platforms.

Everyone's affected - even the biggest names. Brand, size and past performance are no longer the ticket to future success. Competition is red-hot. Disrupters attacking from all sides. Many are running hard just to stand still. Others are going backwards.

I want to share what I've learned and tell you about what FinaMetrica is doing to help people respond.

It's all about relationships

Wherever I was, I had similar conversations. Four forces are reshaping relationships in the financial services sector. Each resonates with Dylan's 'Watchtower'.

1. There must be some kind of way out here, said the joker to the thief

The old business relationships are failing to deliver - in two key ways.

First, many investment managers are losing the funds inflows they enjoyed from the traditional 'gate-keepers' such as asset consulting firms, sovereign-funds and defined-benefit pension plans. That's why they are spending heavily to create new relationship tools.

Second, the traditional relationships used to build product solutions are breaking down. Large firms used to partner with large firms - reputation and capital almost always won the day. But now, simply presenting brand and size is no longer enough. In the age of Uber, firms that can 'do it better' are breaking through.

2. Business men they drink my wine, plowmen dig my earth

Everyone is aggressively out to eat everyone else's lunch. Taking someone else's customer is the only way to grow in a stagnant market - and funds management has flat-lined. Growth barely matches inflation, so global investment managers are working to grow profits by growing market-share. Product offerings are rapidly widening. We see active managers rushing to add passive alternatives, while passive managers are creating active products! Everyone agrees. Passive will be massive.

This is a different face of competition. Many in financial services won't recognise it. This new competition is about using technology and partnerships to get and keep your competitor's clients. That's a different ball game from when competition was about performance and reputation - when the game was played in a growing market -where virtually everyone with a beguiling story could 'win'.

3. No reason to get excited, the robo kindly spoke

Investment managers desperately need to create new relationships that are 'sticky' and profitable. Their key relationship builder today isn't performance or brand - it's auto-advice technology. Fidelity and BlackRock are setting the scene - cross subsidised technology to link to advisors and investors.

The cost of auto-advice is rapidly approaching zero, as investment managers simply want the distribution channel. Every day it seems another has either built or bought a robo-advisor to help them build relationships with businesses that have clients to serve, such as financial advisors, banks and platforms.

4. So let us not talk falsely now, the hour is getting late

Most regulators around the world are abandoning 'tick-a-box' compliance in favour of 'principals-based' systems. The new compliance regime enforces a standard which must be met, rather than a list that must be followed. Firms must now prove they have taken the steps required to meet a standard - and many appear to be struggling.

Large organisations, such as banks, need quality systems that deliver consistent experiences across all channels. Under the new regulatory environment it's indefensible that different arms of the same organisation can give different answers to the same question. And of course, it's this type of inconsistency that alienates clients, diminishes confidence and undermines trust.

Can you feel your own pulse starting to quicken? My guess is that some, or all, of these forces are already at work changing your business. So I think you will interested in what FinaMetrica is doing to help you control your future.

FinaMetrica builds trust & confidence

It's not just the providers like us caught in this turmoil. Our customers are also experiencing a crisis of faith and confidence. Volatility causes distress when markets behave in a way that investors did not expect or is outside their risk comfort zone. They are also suffering. The industry must 'up its game'.

Managing trust and confidence are the core of quality relationships. Our subscribers tell us that we help them create and reinforce both. Our risk profiling tools build strong relationships through a simple intimacy based on 'no surprises'. We've assisted our subscribers to win, and retain, hundreds of thousands of clients over almost 20 years.

Every market correction sees investors lose money by trading at the wrong time. Evidence shows investors are likely to sell-out toward the bottom of the market. We also know, they are just as likely to buy in at the wrong time too - after most of the gains have been made.

FinaMetrica's risk tolerance profiling:

• Scientifically assesses risk tolerance at an 'evidentiary' level - we are defensible in front of a regulator or a court
• Has an evidence based method to map risk tolerance scores to multi-asset portfolios
• Includes best practice education tools to frame investors' expectations, particularly about volatility and returns.

Over the past few years we have been working hard to make our risk tolerance profiling easier to access and simpler to use. Our goal has been to partner with others in the service chain to enrich advisor's conversations. We've integrated into a wide range of systems with open architecture APIs such as robo-advisors, financial planning software, CRMs, data aggregators, research houses, scenario testers and other services.

One of our more notable integrations is now more than 10 years old. It provides for multi-currency, multi-jurisdiction planning in both robo and human advice channels. We now have a risk tolerance profiling solution scalable across financial planning and investment management firms of all sizes, wherever they are in the world.

All along the watchtowers

As I looked, from my watchtowers, across the financial skylines of New York, London, Berlin and Singapore I wondered if the approaching riders were bringing news of something bad that it was too late to change, or sounding a warning about the future.

I think it is a warning. There is trouble ahead and it is time to change the way that things are done.

That's what we are doing - helping people build better advice systems. That protects your business from Dylan's approaching riders and delivers your clients a superior experience and outcomes.


Posted: 26/07/2016 12:49:07 PM by Paul Resnik | with 0 comments

FinaMetrica Maps to Brooks Macdonald

FinaMetrica Pty Ltd - Monday, 25 July 2016

Brooks Macdonald are pleased to announce that the IFSL Brooks Macdonald Defensive Capital Fund has now been mapped to FinaMetrica’s risk tolerance scale. This is in addition to its Multi-Asset Fund range and Managed Portfolio Service that are already being mapped by FinaMetrica.

The Defensive Capital Fund aims to achieve long-term capital growth that is independent of equity market performance and positive absolute returns over rolling three-year periods. The fund does this by investing in a range of defensive assets – investments that are generally lower risk and less volatile than equities, and do not necessarily rely on market growth to achieve returns – such as preference shares, convertible bonds and structured notes.

Head of Funds Distribution, Kevin Addison commented: “We are delighted that the Defensive Capital Fund is now being mapped by FinaMetrica. The fund recently went through £225m in funds under management, affirming the fund’s experienced management team and proven and consistent investment process. The addition of FinaMetrica’s Best Fit score not only enables us to continue to raise awareness of the fund within the IFA community but also builds on the momentum that we have gathered following the fund’s move to the IA Targeted Absolute Return sector.”


Posted: 25/07/2016 10:00:07 AM by FinaMetrica Pty Ltd | with 1 comments

FinaMetrica Maps to MI Momentum Funds

Paul Resnik - Friday, 15 July 2016

FinaMetrica has recently mapped its risk tolerance scores to the MI Momentum Factor Funds, the results of which, can be found here.

“At Momentum, we recognise advisers need investment solutions that provide a level of risk that matches the client’s investment objective. Risk management is a very important element of our investment strategy and it is important that we design investment solutions that operate within a clearly defined risk framework” said Momentum Business Development Manager Richard Adams.

“Risk and suitability weigh heavily on the minds of advisers – often at the expense of performance outcomes and returns. Arguably, the focus on risk as the primary driver of investment selection is impacting clients’ investment returns and their ability to meet their long-term goals. Many risk-controlled investment solutions focus primarily on doing just that, controlling risk, and in doing so lose sight of the fact that the client will have a return requirement. Whereas here at Momentum, our MI Momentum Factor Funds concentrate primarily on targeting a specific inflation plus return within a required risk framework, therefore our returns become deliberate and not accidental to the risk controls put in place at outset. The MI Momentum target return funds suite consists of three funds, targeting 3%, 4% and 5% + CPI annualised since inception. These funds have beaten their targets of 4.5%, 5.5% and 6.5% (with the effect of inflation added) net of all fees and charges since inception” he said.

For more information, visit

Posted: 15/07/2016 2:31:46 PM by Paul Resnik | with 0 comments

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