Partner Insight - Managing the risk of suitability

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Partner Insight - Managing the risk of suitability

Today's advisers must take account of many more risk factors when analysing suitability such as illiquidity and inflation risk. That requires more transparency around fund process and due diligence

Today's advisers must take account of many more risk factors when analysing suitability such as illiquidity and inflation risk. That requires more transparency around fund process and due diligence

Concerns regarding the suitability of investment products recommended to clients have grown as reviews conducted by the Financial Conduct Authority (FCA) highlighted a number of failings by firms.

"Everyone in the industry starts out with the right intentions when it comes to analysing risk and suitability," explains Paul Fidell, Head of Business Development - Investments at Prudential. "An adviser will always aim to have a realistic and sensible conversation with a client in order to work out their attitude to risk, their capacity for loss, as well as the amount of risk they need to take in order to suggest an appropriate fund solution. Where the industry may fall down in this area is trying to turn all of this into something too simplistic like a single risk number."

Risk-profiling

Without fully understanding the people, philosophy and process behind the funds that advisers use, Fidell argues there are questions as to how advisers can make the decisions that will fundamentally affect the financial well-being of the end consumer.

"Risk analysis today is not just about attitudes to risk or volatility but must take into account other points such as illiquidity and inflation risk too. Advisers need support around these subjects, alongside clear, transparent information that explains what a fund's process is and the due diligence a provider offers to ensure that all risks are properly managed at every point. The asset management industry has a real responsibility here."

In refreshing the risk-profiled multi-asset range with PruFolio earlier this year, Prudential has realigned its investment objectives to provide greater flexibility to the teams involved in the portfolio construction process. In turn, this has helped the extended range to align risk parameters much more closely with the types of solutions advisers need for the challenging market environment today, and with the FCA's own objectives for how risk-managed funds should be described to the end client.

But how does this translate to client suitability? For some, client suitability is helping investors to understand the different types of asset mixes that can generate returns. Yet there is also a requirement to compare the amount of risk a client needs to take on to achieve their desired objectives versus the amount of risk they can or are willing to take on. These are all points that must be reviewed on a regular basis, says Fidell.

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