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Morningstar Product Insider

Are Your Advice Tools Getting Risk Right?

Hopefully the worst of the coronavirus pandemic is behind us. But looking ahead, there's no doubt it accelerated pre-existing trends related to financial-advice technology and the expectations of individual investors about the advice fees that they pay and the outcomes they experience.

On top of pandemic pressures, new compliance requirements from Regulation Best Interest in the United States, Client Focused Reforms in Canada, and the Royal Banking Commission in Australia have layered on a greater burden of proof for advisors to demonstrate that the advice they deliver is in the client’s interest.

Indeed, getting risk wrong is costly. It can result in direct losses for retail investors as well as lost clients and legal and regulatory complaints for advisors.

Consider this: On average, 20% of clients leave their advisor within the first year, according to a study by Spectrem Group. When asked why, one of the three top reasons clients cited was the advisor's poor understanding of their willingness to take risk. More specifically, about 31% of investors with $1 million to $5 million in assets said they left because the advisor didn’t understand their risk tolerance.

Getting risk right is worth some extra effort. It's worth setting high standards for the tools we use to assess a client’s risk profile and align that to compatible products and portfolios.

It's more important than ever to really understand what's happening under the hood of your advice software, avoid the shortcomings of past processes, and employ solid, defensible methodologies that meet or exceed new regulatory requirements and, most importantly, can lead to better investor outcomes.

To learn more about the pitfalls of profiling and the science and psychometrics supporting a better approach, please download our white paper: "Measurement of Client Risk Tolerance: How Improving Methodology Could Offer Advisors a Significant Competitive Advantage"

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