Our ATRQ System Attitude to Risk Questionnaire has been included in a review by former FCA technical specialist Rory Percival of the six major risk profiling tools used in the UK. The report tests the questionnaires against guidance provided by the FCA using a model Rory has developed and provides additional materials.
The backdrop for the report is to provide Rory’s views into an earlier study of attitude to risk questionnaires by the FSA in 2011, and also to help advisers prepare for MiFID II which comes into force on 3 January 2018. MiFID II requires advisors to ensure “risk assessment profiling tools … are fit-for-purpose … with any limitations identified and actively mitigated through the suitability assessment process”.
The UK regulator’s previous pronouncements were careful not to name the providers covered in its reviews. We’re planning to use Rory’s analysis as an input into the next release of the ATRQ System, scheduled for Q1 2018.
Highlights from the report include:
- FSA 2011 test: As a whole, the report finds that questionnaires have improved since the FSA’s study which flagged up some poor practices, although didn’t identify any questionnaires by name. The report also notes that questionnaires are now used more appropriately as part of an end-to-end advice process rather than as standalone tools.
- MiFID II test: Rory concludes all six questionnaires ‘are fit for purpose’ for MiFID. This means that questionnaires ‘aid the process of establishing the level of risk the client is willing to take’ as part of a wider discussion with advisers because ‘no questionnaire used on its own can generate the right client risk profile in all circumstances’.
- Questions and answers: The report rates our questionnaire as clear, fair and not misleading which is extremely important. If any questions are complicated or confusing and investors are unclear what they are being asked, the results will be meaningless.
- Risk descriptions and risk mapping: The report flags that our questionnaire provides a qualitative description of the risk attitude in each category rather than a quantification of risk, i.e., we do not provide a mapping from our questions to a specific risk measure. Our clients have preferred to provide this feature themselves as part of a wider advice process including stochastic modelling, a fact find and an assessment of capacity for loss. We’ve always been happy to help clients design risk maps (please get in touch if you’d like to know more), but many adviser networks view this as part of their core proposition that they wish to ‘own’ internally. Some firms see risk mapping as an opportunity for advisers to ‘add alpha’. Another trend is risk-mapping is becoming a specialist function in itself and may be sourced separately using fund ratings agencies as part of a best of breed technology solution.
- Scoring and asset allocations: The report tests which category each questionnaire places a hypothetical investor risk profile into. For example, our questionnaire would describe Rory’s stylised ‘cautious’ investor as ‘moderately cautious’. Our research based, on a regularly updated samples of 2,000 people from the UK national population, finds that the average investor is somewhat risk averse and disinclined to take investment risk. Being average should not automatically equate to a ‘medium’ risk level. This is because risk capacity and the need to take risk must also be considered and a careful assessment of these factors is a key part of the value a skilled adviser offers.
We would welcome the opportunity to discuss these issues with you in more detail. At A2Risk, we work closely with our clients to implement our ATRQ into their advice process in a robust and effective manner, reflecting their particular client base and proposition. Another core part of our proposition is that our tools evolve to reflect our ongoing research as well as market developments and feedback from clients.
Please contact us at firstname.lastname@example.org for more information.