The UK’s Financial Conduct Authority (FCA) has raised concerns over the use of risk-rated funds, stating that advisers should not rely on what on the marketing material provided by the product providers when outsourcing their clients investments instead they must come to their own conclusion on the risk level of a fund.
Technical specialist for FCA Rory Percival said that the regulator is concerned about the adviser due diligence on investments and will continue to investigate the area.
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The regulator’s major area of concern is the risk-mapping exercise performed by advisers using the funds.
Percival said: "What is your understanding of your client’s risk profile? What is the risk rating of the fund or portfolio? Do those map together? You have got to do the thinking and make sure that it is correct. By all means have risk-rated funds but be aware of the context in which they are recommended."
Percival added that depending on the marketing material from discretionary fund managers (DFM) or other authorised firms is considered to be acting unprofessional in the interest of the client, however depending on facts was allowed.
Percival has also addressed issues with determining client risk tolerance, which the FCA was alarmed about, particularly when the risk level was defined by just a number.
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By GlobalData‘"It is worth noting that it’s an area of concern for the regulator as it underpins a lot of the problems and crystallised risk in the past," Percival said.
"Similarly, to what extent an adviser has to monitor the DFM’s ongoing work depends on their own agreement with the client, but broadly advisers are expected to monitor whether the DFM remains the right fit for the client over time.
"If you have got a tolerance for loss that is a three and you have got a portfolio that is a three it does not necessarily say that it right, because there are other factors that need to be taken into account. By all means have risk-rated funds, but be aware of the context in which they are recommended and whether they are relevant to individual clients," he told advisers in the audience," he added.
