The risk profiling provider, Finametrica, use to say that risk profiling results are the start of the conversation, not the end.
What prompted me to write this weeks article is a conversation I had with a financial planning client. He is 3 years from retirement with a very good defined benefit pension and a very small AVC plan. As part of the financial planning process, I looked at the bond heavy content of his AVC plan and recommended moving it to a middle of the road balanced fund, which at present, has 70% equity content.
The broker for the AVC plan advised against the switch. Our client scored a 3 in the risk profiling test and he felt he should have some capital protection for his fund. The balanced fund I recommended has a risk rating of 5, so he didn’t feel it was suitable. He did not take up our clients offer to share details of his overall position, including the assets that he has accumulated outside of his pensions. Everything was based on the score of his risk profiling questionnaire.
All the way back in 2011, the UK’s Financial Service Regulator wrote a paper finding that using risk profiling tools to make investment recommendations resulted in poor advice to the client. Why are advisors still doing this? Because it ticks the compliance box for the Central Bank? Do they not care that it results in bad advice for their client?
Talking of risk profiling always reminds me of a conversation I had with an old client of mine, Tommy. Tommy loved to play poker. He’d often go Vegas, with an amount of money that he was perfectly happy to lose. As a gambler, his risk profiling score was in the top 5%. But when we talked about the investment strategy for his ARF, he said to me “Steven, this is all my money in the world, I can’t risk it like I do when I play poker.”
Making the risk profiling results the start of the conversation and not the end, I got the important details from Tommy that meant I could implement an investment strategy that didn’t keep him up at night.
Steven Barrett
19 May 2025