The report, ‘Advice on Risk and Reward’, analyses responses from 210 UK financial advisers with the aim of providing insights into the ways in which this community measures risk, uses it in portfolio construction and communicates the concept to clients. A key finding suggests that on average, advisers prioritise the client’s attitude to risk above their financial goals. Only 18 per cent of the advisers surveyed often encourage their clients to take more risk to enable them to reach their financial goals and one in 10 never do so.
Rob Gleeson, head of research at FE, comments: “Communicating the various types of investment risk to clients is complex and a daily challenge for most advisers. The reality is that most investors dislike losses much more than they enjoy any gains and advisers are mindful of this. Centring the conversation around financial goals may require them to explain to their client that a change in their attitude to risk is needed to achieve them. Our report suggests that this is a conversation advisers are cautious to engage in.”
This caution may be fuelled by a finding in the report which shows that most respondents - 67 per cent - are unconvinced that increasing risk will actually lead to materially increased returns.
“There may also be fear of regulatory comeback even though it is not likely provided correct processes have been followed and documented.” Gleeson explains.
The report also highlights advisers’ concerns around how to articulate risk to clients. The majority (74 per cent) rely on Attitude to Risk Questionnaires (ATQRs), and focus on volatility above other more complex types of risks that clients are exposed to.
Additional highlights of the research report include:
Despite risk usually being the starting point for portfolio construction, only 42% of advisers always use a risk target when they are building portfolios.
A very high number of advisers (72 per cent) are blending model portfolios or multi-asset funds believing that this will necessarily reduce risk by increasing diversification.
More than two-thirds of advisers are not monitoring underperformance of funds against their own risk targets on an on-going basis, or reporting it to clients.
Almost three-quarters of advisers (73 per cent) think the next five years will be more risky than the past five years.
Not all advisers have access to the full range of tools available to help deal with all aspects of risk and when they do, they do not always know how to use them to their fullest potential.
Mika-John Southworth, director at FE, said: “Our report highlights both the growing professionalism of the advisory industry and some significant inconsistencies in managing and communicating risk. These issues must be addressed to ensure clients have realistic and achievable financial goals and have a clear understanding of potential gains and losses along the way.
“A change in the conversation around risk is needed to move it on from a narrow dialogue centred around volatility and attitude to risk. All parties – advisers, fund managers, data analysts and technology providers – should do more to ensure the debate around risk is a balanced and holistic one.”