For months now, in the build-up to the end of year RDR deadline, fund providers have been anxious to tap into adviser and client demand for risk-rated, multi-asset portfolios.
On paper, the vehicles appear to promise some kind of simplified scenario, where the adviser establishes a risk profile for a client and then matches this to a particular portfolio.
However, what is becoming increasingly clear to providers, advisers and now the regulator is this approach is far from clear cut. Instead of creating a simplified solution, it is adding an extra layer of complexity and confusion.
For providers, the challenge is to make their risk-profile solutions work effectively for advisers, as well as help them navigate the plethora of options available.
It is likely many providers may feel Fidelity’s approach may be the right way to go. The fund group has published a table (see below) of how its multi-asset, risk-profiled range can be mapped against risk-profiling tools.
Fidelity said it started providing the table in its literature in response to demand from advisers for how the range stacks up against tools by Distribution Technology and Sesame Investor Risk Profile among others.
The results show a whole range of different number ratings, even when looking at just one of the portfolios. For example, ratings for the Fidelity Multi Asset Allocator Growth fund range from 4-7, with descriptions including ‘low medium risk’ and ‘medium to higher risk’.
Bearing in mind the table only includes five tools and funds from one provider, when extrapolated across the industry for all the risk-profiling tools and different kinds of multi-asset products, the range of possible outcomes (a key word for the regulator post-RDR) is potentially vast.
On top of this is overlaid the risk ratings fund providers have to add to Key Investor Information Documents (KIIDs) to meet Europe-wide requirements. The ratings have already come under fire as many argue the risk categories are too wide and do not provide helpful comparisons for investors.
So are we heading for a perfect storm for risk-rated portfolios? Well, the regulator has been clear advisers must firstly assess a client’s attitude to risk and then match this to a suitable portfolio.
This must not involve just dumping all clients into various risk buckets, but should take into account their individual circumstances.
If advisers are using risk-profiling tools, they should be aware of the methodology used and the potential limitations of such methods.
It is also up to the adviser to check the multi-asset portfolios used continue to meet client requirements and tolerance for risk.
Between the adviser, risk-tool provider and fund provider there are three areas where confusion could creep in when assessing fund suitability for a particular client. There are also three potential areas to apportion blame if something goes wrong further down the line.
The more information providers like Fidelity can supply the better. At the very least, it will illustrate the complexity of the situation and force advisers to ask the right questions of everyone at all points of the supply chain.
David Stevenson asks why finance professionals continue to charge such high fees for their services in the face of massive technological change.
Sales head departs after eight years
Near-term volatility expected
Fund to offer diversification benefits
Staff blog addresses growing concerns