Tech Review: How good are attitude to risk questionnaires?

Mark Loosmore of AT8 Group reveals how providers are responding to the FSA’s recent paper on risk and suitability.

Over the past few weeks, we have reviewed the platform market and seen a wide range of functionality and features. One area of functionality that has exhibited polarised approaches is the inclusion of attitude to risk (ATR) questionnaires.

Given the interest in ATRs generated by the FSA’s January 2011 paper on risk and suitability, it is worth exploring the issue further to see how the different platforms, product providers and third-party tools are responding.

On or off platform?

When looking at whether the tools should exist on or off platform, the crux of the argument is whether one accepts the legitimacy of having a single platform strategy for all clients’ needs. Despite the headline interpretation, we believe the FSA paper CP10/29 has been explicit in saying that a single platform for all clients for all investments is unlikely (but not impossible).

If we accept that an adviser is likely to use on- and off-platform solutions and that the platform strategy uses a primary platform and two alternative supporting platforms, then it follows that to offer advice consistently across all clients without bias towards a platform choice (which TCF demands), an off-platform ATR is desirable.

On the face of it, this logic works. But if the asset allocation is then performed on a platform, a question arises of how easy is it to match the risk categorisation identified by an independent ATR with the investment selection on a platform that may be using an asset allocation tool with different methodologies or terminology.

There is no easy answer other than to make sure the adviser fully understands the risk definitions and does not use the ATR categorisation as a definitive answer.
Advisers should use the ATR categorisations to support their own knowledge and experience in the process of risk assessment and always include active conversation with the client to ensure the risk profiling result fits their needs and objectives.

Review of the ATR market

To guide our understanding of the ATR and asset allocation tools available, AT8 reviewed the market, sending a questionnaire to 22 organisations including platform operators, product providers, practice management systems, financial planning tools and ATR specialists. We also examined responses sent to the FSA by some of the specialist ATR tool vendors to get an insight into how vendors view the FSA paper. Our findings are compiled in a commercial report released earlier this month.

The responses show that, on the whole, the technology tools meet many of the issues raised by the FSA. One area where the FSA methodology met with consistent criticism from specialist vendors was that the review did not assess the use of psychometric methodologies in assessing customer attitudes. However, it was noticeable that ATR tool vendors have taken the FSA report seriously and are producing formal responses as well as making immediate changes to their software to support advisers dealings with customers.

Responses to the FSA guidelines

Last month saw Financial Express update its newly acquired eValue FE solution to meet the FSA’s guidance and embed the tool into its flagship product, Financial Express Analytics. The update also coincided with a revamp of Analytics, including a much improved user interface.

Barrie & Hibbert does not have a software solution in the same sense to release. It works in partnership with other software firms to create tailored solutions but remains confident that the Byrne-Blake psychometric ATR questionnaire meets the FSA’s requirements. In addition, Barrie & Hibbert has responded to the FSA with a comprehensive point-by-point response to the report’s key findings.