Economist slams 'rubbish' risk profiling by advisers

A leading economist has hit out at the practice of risk profiling carried out by many financial advisers, describing it as “rubbish”.

Speaking at Baillie Gifford's investment conference in Edinburgh last week, Professor John Kay, the founder of the Institute of Fiscal Studies, suggested the models were used to justify decisions already made on other grounds.

Kay, who is currently a director of the Scottish Mortgage investment trust at Baillie Gifford, also dismissed the idea risk aversion could be calculated through a series of questions, the Herald Scotland reports.

He added: "I am not against using these kinds of models as illustrative calculations; what has gone wrong is people believing that they provide an assurance - which not only do they not provide but which no development of these models conceivably could provide.

"What went so badly wrong (in the banks) is that they were the only tools in the armoury of people who didn't understand them in the first place."

In addition to his role at Baillie Gifford, Kay is a visiting Professor of Economics at the London School of Economics, a Fellow of St John's College, Oxford and a member of the Scottish Government's Council of Economic Advisers.

Earlier this year, the FSA warned advisers an over reliance on risk-profiling and asset allocation tools could lead to serious customer detriment.

It reviewed 11 risk-profiling tools and found nine had "weaknesses which could, in certain circumstances, lead to flawed outputs".