The Financial Services Authority (FSA) recently held an informative seminar looking at the subject of investment advice.
Following that seminar it has been reported in the trade press a senior FSA official suggested that advisers should “sense check” the investment advice that they deliver to their clients.
What exactly does that mean?
One of the reasons for this particular suggestion from the regulator is that many intermediaries seem to place a heavy reliance on the use of risk profiler tools in formulating investment advice to their clients.
These tools often have a series of questions which help to identify the tolerance for risk that an individual client might have.
They are useful tools (we use them here at Informed Choice) but should be considered as part of the process rather than the be all and end all of effective investment advice.
By flagging the need for advisers to “sense check” the investment advice that they provide, the regulator is really saying that they need to take into account both objective and subjective issues when formulating such advice.
In essence the nature of the risk that an individual client is recommended to take on should be consistent with their particular goals and objectives. It is all about the individual rather than large groups of people.
A simple example of this might be a client who has an identified financial goal over a defined time period.
For example they may need to have £100,000 available at a given date in say five years time.
Even if a profiling of the client arrives at the conclusion that he takes a “balanced risk” it does not follow that money he has available to invest should be invested in a “balanced” portfolio. If the goal can be achieved without the need for any investment risk then that may well be the most appropriate course of action.
Perhaps he could keep the money he has in a cash deposit earning interest (however poor that interest is at the moment) rather than investing at all and running the risk of seeing the capital fall in value.
Sense checking investment advice does indeed make real sense. Sometimes the best investment can simply be the one that you didn’t make at all.
