Risk profiling: Advisers question tools’ ‘spurious’ accuracy claims

Providers’ claims that attitude-to-risk questionnaires can be as much as 93% accurate are being challenged by advisers.

Claims that a new risk profiler is more accurate than standard versions because it includes extra questions have re-ignited a debate about the precision of attitude-to-risk (ATR) tools.

Adviser network Personal Touch Financial Services said a ‘reliability analysis’ of its 15-question Risk Profiler – provided by Oxford Risk - found it correctly places clients in one of ten linear bands 90% of the time.

This improved on the 86% accuracy of Oxford Risk’s standard ten-question version, it said.

But wealth managers and advisers said risk profilers should form no more than a “starting point” with clients.

One said he had evidence that in-depth conversations with customers who had already been placed in a risk category by a 'risk profiler' often led to them being re-assigned.

Verbatim Asset Management, the investment arm of SimplyBiz, currently offers advisers the choice of Distribution Technology questionnaires, which have ten or 20 questions.

But managing director Neil Stevens said the result given by risk-profilers should not be seen as a definitive reflection of a client’s ATR.

“You’ve got to be careful of spurious accuracy,” he said. “Trying to pretend these things can be more accurate than is the case is really quite dangerous. It’s about how well the adviser has done the fact find and how well they know the questionnaire.

“I think the FSA is worried about people abdicating responsibility to the questionnaire. They are very useful tools but advisers can’t let them take over.”

Stevens said small-sample research he had recently undertaken suggested clients’ risk ratings were changed in around 40% of cases after a deeper conversation with the adviser.

Neil Liversidge, managing director of IFA West Riding Personal Financial Solutions, said the accuracy of risk-profiling tools was irrelevant.

He said he used the tools as a means to start client conversations and to get customers to “confront their own conflicting ideas of what they want and should have from their portfolio”.

“I’m suspicious of all systems, such as psychometric tests," he said. “We have a conversation, we explain risk and, if anything, we overdo the risk warnings. Advisers who rely on questionnaires are the ones who don’t know anything about investments.”

Martin Vaughan, director of Paragon Paraplanning, agreed that ATR questionnaires should provide a starting point for a conversation with the client, although he pointed out more questions can sometimes help.

He said: “With risk, we need to check that the answers clients are giving are the correct ones and that they haven’t misunderstood anything.

“If there are any anomalies, the adviser can then explore that with the client. Having more questions than less, to a point, would appear to be beneficial.”