Each month we ask leading industry figures to answer one big question...
A recent report from KPMG said advisers may be playing too safe with client money for fear of being punished by the regulator for mis-selling riskier products. Do you agree that this is happening and, if so, what are the consequences?
Nigel Barlow is director of technical product development and marketing at Partnership
It is difficult to comment on whether advisers are being unduly cautious in their asset allocation or their choice of products generally but retirement income is not a field with an even distribution of pain.
In retrospect, it is easier to demonstrate that the balance of probabilities favoured one approach over another than it is in prospect. In the generation of retirement income, however, an approach that proves, in retrospect, to be too risky costs far more than one that is too cautious.
A significant fall in income in retirement is, for most people, far more painful than foregoing the potential of a higher income and, thanks to the nature of pound-cost-averaging in decumulation, often unrecoverable.
The pain remains for the rest of the client's life. In such circumstances it is easy to see why one may want to exercise caution.
Peter Carter is product marketing director at MetLife
This is really a process issue. Advisers who have an established process for assessing clients' attitudes to risk and making recommendations and can document that process should have no regulatory concerns about recommending any product to a client.
Of course, that is easily said. Issues can arise even with a rigorous process. Clients may not understand the implications of determining their attitude to risk as this becomes central to the product recommendation.
If, as the KPMG report says, this is happening it is by no means certain that playing safe would protect an adviser from regulatory risk.
The same issues apply if an adviser plays too safe. A client who says in a risk assessment that they are adventurous may be equally disappointed if they are recommended a fund which is too cautious and lose out when markets race ahead.
James Corcoran is a financial adviser at Courtiers
Determining the level of risk a client should be exposed to should be entirely predicated on the client's own individual willingness and ability to take risk, taking into account their specific needs and objectives.
If you understand your client's attitude to risk and are comfortable with your advice process then the FSA's views should not be of concern. We feel the area where the FSA has affected the advice process is the requirement for more and more evidence to back up the advice.
This is, in essence, a positive move, as advisers should be spending sufficient time ensuring they understand their client's objectives, and clearly explaining the reasons why a course of action has been recommended.
But this can have the knock-on effect of reports becoming so long it makes it unlikely the client will actually read them, negating the reason for producing them in the first place.
Andrew Gadd is head of research at the Lighthouse Group
As we all know, when advising client's, risk rating is vitally important because in the UK there are many examples of individuals being mis-sold products which did not fit their risk profile.
The benefits of getting it right, however, are also significant. From the client's perspective there is the opportunity to avoid unwanted investment experiences which are either too risky, or indeed what the Sandler review called "reckless conservatism". Here, many UK consumers adopt a ‘low-risk' investment strategy at the risk of significant opportunity cost.
Ultimately, it is for an IFA and a client to determine an appropriate risk profile and capacity for loss and for that to be fully documented at outset with the resulting advice shown to match the conclusions reached.
Julie Hepworth is group regulatory manager at Perspective Financial Group
It is an inevitability that events of recent years such as Arch Cru, Keydata, life settlement funds and so forth will make advisers more wary of ‘riskier' products than they have perhaps ever been in fear of the domino effect of increasing professional indemnity costs and future liability costs.
Combined with the complaints culture we now live with, these factors come together to create a perfect storm which is driving advisers to ‘play it safe' - be it an approach that is imposed by an employer or one that is taken by a business owner.
The irony in this, however, is that the regulator could frown upon an adviser taking this approach if a client's risk profile and capacity for loss accommodated them being invested in ‘riskier products'. The suitability report would need to fully discount why riskier alternatives had been dismissed."
Carl Lamb is managing director at Almary Green
I am surprised that KPMG's recent report suggests advisers may be playing too safe with clients' money for fear of being punished by the regulator for mis-selling high-risk products.
IFAs should not be selling these products to ordinary investors in the first place.
Under the TCF rules, ordinary investors should not be offered products which are unsuitable for them and difficult to understand. UCIS, structured products and so on are often high risk, illiquid and opaque and you cannot expect ordinary investors to understand them.
Some advisers recommended Arch Cru and Keydata without understanding the risks. If they had done, they would never have sold these products in the first place.
Also, if something goes wrong, (which is more likely with a high risk product), the FSCS compensation bill falls on all investment advisers, irrespective of whether they sold these products.
Ian Lowes is managing director at Lowes Financial Management
I am not aware that this is occurring, but it would be another case of the regulatory tail waiving the advisory dog.
Often, taking the least risk with client money is the biggest risk. The fact is, with inflation running at 3-3.5%, the basic rate taxpayer is going to have to earn considerably more than that in order for the value of their capital just to stand still. With the very best deposit accounts paying per annum interest that is little more than inflation.
To either accrue or maintain long-term retirement funds, investors have to realise they need to take some risk with their money or suffer capital erosion.
Market volatility is likely to be with us for the foreseeable future and if advisers are telling clients to avoid equities or other perceived ‘riskier' investments for the wrong reasons then ultimately it will be the client that suffers. It is a strategy that could come back to bite the adviser in the future.
Neil MacGillivray is head of technical support at James Hay Partnership
To answer this question, I think you first of all have to deconstruct the statement.
Last year, the FSA sought to engage with advisers on the topic of suitability after finding a mis-match between clients' attitudes to risk and the actual investment selections.
In the advised-population as a whole, clients will cluster around the ‘average risk' tolerance. However, as a provider of a full SIPP offering we would expect to see a skewing towards the higher end of the spectrum reflecting the desire for investment flexibility within the product offering.
If advisers are to continue to be able to offer appropriate product solutions, then they need to be free to determine what is suitable and what is not, subject to the caveat that the solution has to correlate with that particular client's risk tolerance.
Matthew Phillips is head of private client stream at Broadstone Pensions & Investments
The changing regulatory environment has meant that a ‘risk off' culture does pervade the provision of financial advice.
Put simply, we are unlikely to see clients taking advisers to task for not taking enough risk in their portfolio in the current economic climate.
In the first instance, commercials dictate that the risk of even having a complaint from a client and the time it takes to deal with, mean that even sub consciously the risk/ return of providing perceived riskier advice does not pay off in the short term.
This could be a genuine threat in years to come as inflation bites, and the returns required from client portfolios is not sufficient to keep up.
It is the responsibility of the regulator to ensure that this risk is also protected against. Presumably, the role of the state is to be here for the long term as opposed to financial advisers, who, when the client comes seeking redress, may well have retired, merged or disappeared all together.
There is too much focus in the current climate, on the short term, and this lack of risk taking is only storing up further problems down the line... as well as choking off one of the best ways for funding innovation and growth for the future economy.
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