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Following the publication of the FSA Guidance: Assessing Suitability, Establishing the Risk a Customer is Willing and Able to Take and Making a Suitable Investment Selection. March 2011, David Roberts, director of strategy and marketing comments on Amatica's approach to the implementation and use of risk profiling tools for investment and wealth management firms.

"At Amatica, we have viewed the often naive and sometimes overly sentiment based approaches to investor risk profiling with concern and scepticism. All too often they appear to merely satisfy a form of box ticking and record keeping rather than a reliable method of evaluating an investor's risk appetite based on their financial circumstances. Some tools take similar approaches to that of personality and psychometric testing software and relies on the customer's sentiment rather than their financial ability and willingness to take on levels of investment risk. An example of the weakness of this approach is where investor's psychometric profile supports an appetite for risk but is contradicted by their current personal and financial circumstances; advising a cautious approach to investment or even to pay-down debts instead might be more appropriate advice.

"We've yet to see a risk and asset allocation profile tool that's based on astrology but we wouldn't be surprised to find that there's one being used somewhere. "Mars is ascendant so we recommend a portfolio focussed on aerospace and defence".

"Many profilers reveal the constrained thinking inside a software developers mindset. "I'll grade these fixed questions so that my program will always arrive at the right answer." Actually no.

"As everyone should know, a person's attitude to risk is very different to their ability to accept the negative impact of risk. An ascending career, a growing business, a high salary boosted by bonuses and money in the bank generally engender a greater appetite for risk. Ask the same person on their attitude to risk when they've been sacked and their financial assets are under threat and you'll get a different response. Just one day can make all the difference.

"At Amatica, we believe that investor risk profiling has much to offer but as with all questionnaires, the questions and answers for selection must be carefully worded and structured otherwise the profiling becomes meaningless. In addition, a risk profiling approach that works for boutique and specialist wealth managers with medium and high net worth investors is completely different from the approach appropriate for mass market consumers.

"Evaluating investor risk appetite and the level of risk that they should or should not accept and then deciding the asset allocation are two separate stages of taking on a customer. Chose your software solution wisely and remember that the process should be understood by everyone involved, customer and advisor included, should record the recommendations and be reviewed regularly. This way, you will be able to not only demonstrate to the FSA that you take risk suitability seriously but your business will benefit from knowing the customer better and the customer knowing that you take their investment decision seriously too. And it won't harm your customer relations by having a valid reason to speak with them on an annual basis."

© Amatica 14/06/2011