Advisers solely recommending risk-rated funds are opening themselves up to "danger", Skandia has warned.
According to the group's Shield portfolio manager John Ventre, there is a "fundamental difference" between risk-rated funds - which provide merely a "point-in-time" suitability assessment - and risk-targeted funds designed to manage volatility and risk on an ongoing basis.
"There is a lot of movement with RDR for advisers to provide investment solutions for customers which meet their capacity for loss and capacity for taking risk," said Ventre.
"For me there is a bit of a danger in picking something which is currently suitable for their capacity for loss and capacity for risk but might not be in the future."
Ventre said that, while a risk-rated fund may be suitable for an investor initially, this might not be the case after two years because the fund could be run with a different philosophy or by another manager.
"It's underestimated quite how much funds which are just risk-rated can change in their risk characteristics through time."
Sticking to a risk-rated philosophy requires more ongoing due diligence and monitoring than a solution which maintains its risk characteristic and is volatility-targeted, said Ventre.
"When advisers take on just risk-rated funds they are taking on a lot more risk and more responsibility to ensure it meets risk expectations," he said.
"A risk-targeted fund is more likely to be able to continue to meet the customer's needs because you are actually tying the risk tool, advice process and the ongoing management together."
Advisers just using a risk-rating strategy could also land themselves in hot water with the regulator, he said.
"Imagine if the risk rating of the fund changes and the adviser does not pick that up", said Ventre. "They have a customer invested in a fund which is not suitable for them which would expose them to some risk from a regulatory angle."
Meanwhile, research group Rayner Spencer Mills said many advisory review processes fail to establish the correct client risk attitude and profile.
Director Ken Rayner said the regulator would continue to scrutinise how advsiers determine attitude to risk in the run up to the RDR.
‘Important to have an anchor’
Report to be written by TPR
Lack of innovation for solutions
Some 2,000 consumers affected