Concerns raised over life company risk tools

An adviser has urged caution over the use of life company risk tools to design client portfolios after concerns surfaced about Zurich's Risk Profiler.

Claire Markham, investment director of Lincolnshire-based F H Manning Financial Services, found a significant anomaly in the results generated by the tool for a particularly risk-averse client.

Markham asked a client to complete the seven-question assessment as a basis for discussing risk. The customer answered 'not sure' to six questions on the survey but in answer to a question about their reaction to a decrease in value of the portfolio by 25% over a year they answered: " Horror, security of my capital is critical and I do not intend to take risks."

After inputting the results into the Zurich Risk Profiler, Markham was surprised when it recommended her client had a "balanced attitude to risk" which could include investing up to 59% in equities.

She says: "I was horrified that a system which some advisers use as a rule of thumb for designing portfolios could possibly result in such an outcome."

Markham contacted Zurich to ascertain the methodology used in the system, but is still awaiting a response. She also insists this type of questionnaire-based approach needs to overhauling.

"If the client wants no risk to their capital, then the rest of the questionnaire becomes irrelevant. An extreme response should be an overriding factor," says Markham.

She adds that having used the Zurich system for a number of years, she is now considering other tools, in spite of the expense it would involve in changing the firm's back-office system.

Chris Smallwood, chief executive of 2Plan Wealth Management, says it has tested many 'risk-profiling' questionnaires and found many are angled in favour of the provider.

His comments come after 2Plan Wealth Management launched a system allowing for the generation of several risk profiles for clients within a single portfolio.

Smallwood says: "IFAs need to use independent technology tools."

Mark Peters, investment market manager at Zurich, says it does not intend to make any immediate changes to its risk-profiling system as it feels it is robust, but welcomes further feedback from IFAs.

Peters says: "These questionnaires are designed to be starting point for a risk discussion. The answers are uniformly scored so that one response does not have an over-riding effect on another as we want to gain a holistic view."

He adds that Zurich will be contacting Markham soon in response to her inquiry. Peters says: "There is always scope to improve systems."