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Is your ATR assessment fit for purpose?

Our regulator (the FCA) and the Financial Ombudsman Service (FOS) continue to identify deficiencies in how financial advisory business assess, discuss, agree and record Risk for clients.

We believe that the engagement of agreeing how much risk a client is willing to take is critical to being able to demonstrate the suitability of any investment recommendation.

Documentary evidence of how you agreed how much risk the client is willing to take is always going to be one of the most important areas of your advice process.

Below we have set out 4 key drivers in agreeing how much risk a client is willing to take.

Tolerance

Tolerance is normally assesed by a risk questionnaire.

This is the amount of risk that an investor is comfortable taking, or the degree of uncertainty that an investor is able to handle.

Risk questionnaires are designed to reveal the level at which an investor can invest, but still be able to sleep at night.

Tolerance is more about how the client feels, rather than an action they may take.

Capacity

Tolerance may help give you an insight into the type of character the client is. Unlike tolerance, capacity does not care how something makes you feel; it cares about what you will or won’t be able to do in the event of a loss.

The client’s timescale for investment will affect their capacity for risk; the shorter the period of investment means there is less time for an investment to recover in the event of losses, thus reducing the capacity available.

The FCA in assessing suitability would test whether a client could stand larges falls in the value of assets and whether this would cause financial hardship from short term losses.

Risk required

Put simply, how much return is needed to meet the client’s goals and objectives. Can less risk be taken to achieve the client’s goals or should clients accept more risk in the hope they can achieve their objectives.

Investment experience

Understanding a client’s investment experience will help shape how much risk a client is willing to take, those that were invested during the last financial crisis will be able to explain how they felt seeing fluctuations to their assets, similarly those that have always invested in cash based savings must have done so for a reason, why was this?

Actions

Consider reviewing your risk assessment process to ensure it is fit for purpose and that the process is consistently used with multiple RI business.

If you would like to discuss how your firm assess a client’s attitude to risk, or if would like a review of you risk process please do get in touch.