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Compliance chokes asset allocation

Regulatory requirements have not kept pace with best practice on asset allocation and client risk profiling, according to research house and boutique advice stakeholders.

Traditional risk profiling practices, whereby clients are characterised according to their stated risk tolerance preferences, are outdated and new approaches need to be reflected in regulations affecting advisers, delegates to an ifa roundtable have said.

“Traditional risk profiling has not kept pace with compliance, right through to FOFA – it’s a real problem,” said SFG private client adviser Jamie McKay. “Having real flexibility is really difficult [under traditional risk profiling] because if you have a client that has a ‘highly conservative’ risk profile off the back of a questionnaire, it might result in an outcome that is a disaster for them in terms of their goals.”

Mr McKay added that since the global financial crisis, many financial planners have been determining asset allocation strategies in line with “their own fears” of non-compliance, rather than with the client’s best interests.

van Eyk head of asset consulting Jonathan Ramsay agreed that a more “nuanced and complex” understanding of risk profiling from the regulatory authorities was needed to ensure asset allocation and portfolio construction are being conducted in the clients' best interests.

“The most compliant portfolio out there is 70 per cent in fixed income with no real chance over three to five years of achieving a CPI plus two per cent outcome – so the compliance is making people do things that just don’t make sense,” Mr Ramsay said.

According to Omniwealth senior financial planner Andrew Zbik, this is an issue the whole industry – not just forward-thinking individual advisers – should bring to the attention of the regulator, so “they can build in that flexibility we all desire”.

Tim Mackay of Quantum Financial said that if risk profiling means “asking a few multiple questions” and determining asset allocation strategy off the back of it, this is insufficient, but that risk profiling is still a useful tool in better understanding and developing rapport with clients.

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