FSA Guidance Consultation - client update January 2011

Using Dynamic Planner® enables advisers to deliver risk profiling and suitability in line with FSA good practice.

Distribution Technology welcomes the FSA Guidance Consultation Paper, ‘Assessing suitability’ published yesterday and the great majority of insights it provides. Dynamic Planner® based tools enable the risk profiling processes seen as good practice by the Paper. The Paper supports a number of principles that we have consistently advocated over the last seven years.

This note provides clients with our initial feedback on the Paper. A more detailed response will follow for both clients and your advisers. There are a small number of points raised in the Paper on which DT will seek further clarification from the FSA. We will also be discussing our detailed response with clients individually and at our user group on January 26th.

In summary, referring to the key findings:

Relying on risk profiling and asset allocation tools

         
• It is important that advisers do assess their customers’ attitudes to risk; it is a cornerstone of good financial planning. We welcome the FSA’s focus and guidance in this area.
         
• It is important that the adviser plays an active role in assessing a customer’s attitude and capacity for risk and applies their expertise and understanding to support ‘know your customer’. We have always advocated the role of tools as a support to the professional adviser, not as a replacement.
         
• Dynamic Planner is an holistic application and supports a comprehensive discussion by the adviser with the client around their needs and objectives. The Paper sees this as good practice, as opposed to focusing solely on risk attitude.
         
• Dynamic Planner supports what the FSA describes as good practice through the provision of management information, client records and audit trails helping our clients understand and manage how tools are being used and advice managed, throughout their organisation.
       

Poor descriptions of attitudes to risk

         
• Dynamic Planner is an industry leading risk profiling tool and its questionnaires have been developed in conjunction with psychometric experts Oxford Risk. These questions and instruments have been tested on robust samples of consumers and have a proven reliability of 84% (10 question version) and 92% (20 question version) in predicting attitude to investment risk within the UK population.
         
• Our risk level descriptors provide a clear explanation, together with an indication of how investment performance can be affected (including capital loss), using monetary examples for a range of outcomes; in words, figures and charts. The application does not rely solely on volatility as a proxy for risk. The FSA cites this as good practice.
         
• Customers have the opportunity to explore different risk profiles and to change it if required – this is an interactive process.
         
• Dynamic Planner separately assesses ‘attitude to risk’, ‘capacity for loss’ and investment time horizon which the Paper advocates as good practice. The application does not provide a ‘conflated’ answer which quite rightly the FSA has concerns over.
       

Failing to support suitable investments

         
• At DT, we recognise the importance of aligning funds and portfolios to risk profiles. We introduced a Fund Risk Profiling Service last year to help asset managers classify the risk levels of their products and funds in a manner consistent with Dynamic Planner’s risk profiles.
         
• The paper points out the importance of any products, funds or portfolios selected for the customer’s investment being aligned to the asset allocation associated with that risk level. Dynamic Planner supports this process (see Understanding products and underlying assets below).
         
• Dynamic Planner supports both the provision of model portfolios as well as the ability to amend these, or build bespoke solutions based on a customer’s needs and risk profile. The risk of the resulting portfolio can then be re-assessed against the agreed risk profile. This is seen as good practice by the Paper.
       

Inappropriate focus on the risk a customer is willing to take

         
• Risk profiling within Dynamic Planner is only one part of the investment or financial planning process an adviser can undertake. As set out in the Paper, Dynamic Planner enables advisers to discuss other goals, the term of investment and other priorities, including debt repayment for example.
       

Understanding products and underlying assets

         
• The FSA is rightly concerned over the recommendation of solutions which do not meet the customer’s agreed profile and needs because the risk of the products and underlying assets are not well understood. Dynamic Planner does not rely on ‘labels’ provided by funds, rather on a detailed analysis of their underlying holdings and the potential risks which these may represent.
         
• DT offers a fund risk profiling service for clients who wish to ensure that the risk of their products and funds is a good match to the risk profiles for which they are intended.
       

Responsibilities when using tools

         
• DT provides a range of collateral and guides (such as Safe and Effective Use of Tools: Adviser Guide), training and due diligence materials such that our clients understand both the strengths and limitations of Dynamic Planner.
         
• DT will be updating these guides in the light of this Paper to ensure that clients continue to get the support they need when introducing and providing tools to advisers.
       

07/01/11