The Financial Services Authority (FSA) should extend its guidance on investment-switching suitability to consider volatility and risk, according to Skandia Investment Group.
A recent consultation paper from the regulator looked at how advisers were justifying investment switches and other replacement business after it found some troubling practices during its review into centralised investment propositions.
While it focused on issues such as costs, investment returns and tax, Skandia said it should include explicit references to volatility and risk as other important factors advisers should take into account.
Ryan Hughes, portfolio manager at Skandia Investment Group, said: "Returns, cost and tax are naturally very important factors but a customer's understanding and tolerance of risk must also be factored into a suitability assessment.
"Financial advisers should be able to demonstrate that the investment solution they are recommending is being specifically managed to remain within a set volatility range for its entire lifecycle, rather than just having a risk score attributed to it at any one point in time."
The company, which offers a range of risk-targeted funds through its Spectrum range, added that, where volatility control was important to customers, advisers should demonstrate the extent to which a new investment solution recommended would be capable of controlling volatility.
In its recent paper, the FSA said it had identified a large number of firms that were failing to provide adequate justification to switch investments.
It said that this posed a "significant risk that consumers are receiving unsuitable advice to switch, when they may have been better off holding an existing investment".
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