Bill Jamieson: Tick–box risk assessments really tick me off
I AM about to be put into a box. Readers may feel this is long overdue. But before I am entombed for an indefinite period, I wish to say a few words.
The box is a risk box. I have been inundated with forms from fund managers and financial consultants informing me of changes in the basis and nature of financial advice that they give. Detailed risk categories have been devised. The texts bristle with wordy boxes on low risk, low-to-medium risk, medium-to-high risk, and so on. In a beguiling step-by-step process illustrated with helpful playbook arrows, I am to be guided to one of these risk boxes and lowered into it for my own good.
All this is to be preceded by a risk assessment, an exercise in which not only my tolerance to risk is to be exposed, but my very soul. Investor, know thyself.
I fleetingly hoped that, when I opened these envelopes, there would be information of a personal nature to me and pertaining to my individual investments and circumstances. Instead, it was from the Financial Services Authority (FSA), which presumes to have more knowledge about my investments and circumstances than I could ever hope to acquire.
The FSA – scorched by nasty experiences with mis-sold products, dodgy advice, poor performance and administrative blunders, all compounded by high volatility and eye-watering charges and commissions – has found the regulatory beat tough going. So its general approach is to heighten our awareness of risk and encourage us into the lower-risk categories.
Now, I agree we should understand the nature and degree of risk. And it is right that we should think carefully about the investment commitments we make, the risks we are taking on and making sure our savings fits our risk appetite and our purpose.
But there are problems. The first is the individuality of investor needs. Not all investors can be comfortably slotted into one of those “Low-to-medium risk with income bias categories” and the assessment then pronounced “job done”. There is more to investment than a quiet life for the regulator.
A second is the constantly-changing nature of markets and thus of our risk tolerance. The huge variation in the monthly inflows into Investment Management Association trusts and funds alone vividly illustrates how our risk “tap” can turn on and off swiftly and in volume.
For the past two years, institutional investors have been shown to change very quickly, giving rise to the phenomenon known as “risk on” and “risk off” periods. These can change within months, sometimes days. So if investment professionals can jump so readily between different classes of risk, what purpose is served by confining private investors to categories that may cease to reflect their preferences and could condemn them to sub-par returns?
A third concern is that many savers have more than one “pot” and have different requirements and objectives for each of these. Many of us approach our pension savings in a quite different way from a small portfolio of ISAs – we would certainly prefer our pension savings to be at less risk, while our approach to another pool of savings may be quite different.
The investment adviser would need to know about all our other savings before being able to arrive at an informed judgment as to the risk being taken on by a client who has entrusted only a slice of their money to them. And that is why many savers switch off when they see these forms. For reasons of prudence, they do not like all their financial affairs to be declared to one adviser. That intruding nose, for all its best intentions, can be the quickest turn-off from all this form-filling.
Finally, there is the deceptive nature of these risk categories. For example, I notice in many of the boxes described as “low risk” there is a substantial allocation to fixed-interest and bond funds. Given the huge volumes that have been attracted to bond funds in recent years and the real risk that further resort of quantitative easing could tip the risk scales towards inflation and spark a flight from bonds, I am not confident in regarding those “low-risk” categories as being any such thing.
The purpose of saving is to at least match, if not beat inflation. Failure here undermines the entire purpose. It may suit the purposes of the FSA to create a universe in which millions of people are encouraged to accept negative returns. But this is where the purpose of the FSA diverges from investor protection. And it should form no part of a financial adviser’s purpose to lure clients into the false safety of a so-called “low risk” box that results in the real loss in the value of client savings.
It is with these deep misgivings that I return to the pages of forms beside me and ponder my fate. How can I tell my financial adviser to sod off with these forms without being rude?
What investors require is personal attention, well-informed advice, reliable administrative back-up and a fee charge we can easily understand. Oh, and every so often, a good lunch to make sure we are at least well-fed before we are lowered with a cursory FSA blessing into that black box of low-risk eternity.
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