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Provider warns over use of unregulated risk mapping in suitability process

8 May 2018

Adviser firms could be at risk of giving their clients ill-matched portfolios, potentially falling foul of the regulator, by relying on unregulated providers for risk mapping, PortfolioMetrix has warned. 

In a new paper Risky Business: why the regulator is right to be worried about risk mapping, PortfolioMetrix outlines why some investment portfolios could be entirely wrong for clients without advisers realising it, yet advisers must shoulder the responsibility for any mis-matched suitability issues.

Mike Roberts, PortfolioMetrix UK managing director and head of innovation, said: “The issues ultimately come from poor assumptions.  The most obvious is assuming the scale labels given to risk-rated portfolios align with those used in off-the-peg risk mapping tools. The next assumption that could lead to issues is matching the volatility target of the risk profiling scale to the volatility target of the portfolios.  The final assumption is that even if the risk profiler firm has done the mapping to the portfolios, that the mapping will not degrade over time.”

For its paper, PortfolioMetrix analysed the risk and return characteristics for the last five years of the 20 largest multi-asset funds by cautious, balanced, growth and adventurous labels. The company said the results showed an alarming difference in risk/return ratios.

Roberts added: “Ensuring portfolios align with clients’ risk profiles is a complex issue, which we’ve tried to explain in our paper. At the very least, advisers can help themselves and their clients by using risk mapping tools that are designed to work with specific portfolios and have a mechanism for maintaining the mapping over time.

“Generic tools may seem like a good solution but our analysis shows advisers are the ones at risk if the mapping and the chosen portfolios don’t match up.”

The PortfolioMetrix paper is available to download free at: :http://info.portfoliometrix.com.pages.services/uk_risky_business/

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