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IFAs: assessing the process of assessing suitability

By Tahmina Mannan FE Tips

Updated on Tuesday, 3 November, 2015

Financial advisers can underline their value to their clients by not just firming up the investment suitability process but also by explaining each step to educate the investor. 

In its final guidance paper on assessing suitability in 2011, the Financial Conduct Authority laid out what would be the new lay of the land – and that is: simply using a questionnaire to help assess portfolio suitability would no longer be acceptable.

The paper was, of course, a must-read for advisers in the UK. It identified the key issues an adviser needs to consider when assessing attitude to risk.

These include:

• how robust is your process for assessing the risk a customer is willing and able to take, including their capacity for loss;

• does your process appropriately interpret responses to questions or does it attribute inappropriate weight to certain answers;

• do all parts of your process pass the ‘clear, fair and not misleading’ test – especially questions and risk descriptors;

• do you have a robust process for ensuring investment selections are suitable that considers customer’s objectives and financial situation as well as their knowledge and experience;

• do you understand the nature and risks of the products or assets you have selected for customers; and

• have you sufficiently engaged the customer in the suitability assessment process.

The main takeaway from the regulator’s stance on the subject is that the investment outcome delivered by an adviser’s risk assessment should meet the suitability rules.

Therefore the tools should be used as part of a complaint investment advice process – the regulator wants clients who are advised to make informed decisions regarding the investment choices they are facing.

The FCA also wants advisers to put in the same stringent process when it comes to selecting a questionnaire or tool to assess the actual suitability of it.

Advisers should be confident that the questionnaire or tool they use is ‘fit for purpose’, and that they understand how to use this as part of a stringent compliant investment suitability advice process. Lastly, advisers should know the benefits and shortcomings of the questionnaire or tool they use – and in the case of a weakness, compensate for it to firm up the process.

The process of using a tool should ensure that the output report is discussed with the client. Remember that the tool and the output report are simply there to help stimulate a discussion between you and your client on issues of risk and volatility.

This output report should ensure that any inconsistencies in answers are explored and that the final score is agreed with the client or amended and agreed with the client.

The implication of the score from the questionnaire and the relevant asset allocation the client is advised to follow should be explained to the client along with some form of stress testing/scenario testing.

Does your client really understand the difference between risk and volatility? How would you communicate those difficult concepts to your client so that they are fully equipped to make an informed decision?

At this juncture, advisers can underline the value they bring to the financial decision making process.

The discussion you have with your client should conclude with the client expressing an understanding that the portfolio meets their objectives, the risk required to meet these objectives and their capacity for loss.

Ultimately ensuring clients understand the risk they are taking on is likely to require a process of client education and testing for understanding, using additional questions and affirmations on an ongoing basis.

This is not just a defensive move by the adviser but a source of added value and coaching to the client on an ongoing basis in the light of changing market conditions and personal circumstances.

This is something that is highly-valuable and will underline that there is a real need for financial advisers in the future of financial planning, especially in today’s landscape where the threat of the robo-advice seems to be a growing concern for the advisory industry.   

 

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