Former Financial Conduct Authority (FCA) man turned regulatory consultant Rory Percival said he frequently sees adviser firms confuse a client's capacity for loss with their attitude to risk.
Speaking at PA360 North, Professional Adviser's flagship northern conference, Percival (pictured) spoke to delegates about good and poor practices when assessing a client's capacity for loss.
He said he "still" regularly saw firms confusing capacity for loss, which he said was about numbers surrounding affordability and a client's standard of living, with risk profiling, adding: "I would have thought the sector would have understood this by now".
The former FCA technical specialist said the way advisers were approaching discussing capacity for loss with clients was also largely wrong.
He said advisers tended to ask clients: "What is your capacity for loss?" Doing so, he said, would produce a wrong answer almost every time, because calculating capacity for loss is a complex mathematical equation that clients cannot answer.
"You fundamentally need to move away from asking the client about capacity for loss - clients can't possibly calculate this properly," he continued. "Don't ask the client what they can't answer. Ask them what they can answer, [like] ‘what income do you need in retirement to maintain your standard of living?'"
"I will go as far as to say more firms than not do not do capacity for loss adequately," he added.
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