Market Research

EXCLUSIVE: Risk-Profiling To Have Its "Day In The Sun", Say Experts

Wendy Spires Group Deputy Editor London 13 June 2012

EXCLUSIVE: Risk-Profiling To Have Its

Upgrading risk-profiling procedures should be seen as an opportunity rather than just a compliance headache, experts said at the latest Breakfast Briefing event in Zurich.

It’s widely accepted that the industry needs to improve its client risk-profiling processes in light of increased regulatory oversight, but wealth managers should be looking at the issue in terms of the opportunities it presents rather than as a compliance headache – that was the “takeaway” from WealthBriefing’s latest Breakfast Briefing in Zurich last week.

The event brought together a diverse range of senior professionals and a panel of experts who all agreed on one key point: risk-profiling should be at the heart of a forward-thinking wealth management proposition.

The Breakfast Briefing was built around the latest WealthBriefing research report, produced in association with Advent, entitled Beyond Box-Ticking: Leveraging Enhanced Risk-Profiling To Enhance Client Experience. Among the headline findings of the report were that wealth managers view risk-profiling as key to improving relationships and empowering clients, but the systems and processes prevalent in the industry often thwart these wider aims. The reader survey on which the report was based found that practitioners broadly rate the industry’s record-keeping of all the client information related to risk-profiling as being average at best.

Using information optimally

In fact, the underuse of client information - it being gathered at onboarding and then filed away seldom to be seen again - was a problem highlighted by both attendees and the expert panel. They agreed that it is not that wealth managers aren’t gathering the relevant information from clients, more that it is not being utilised optimally.

For Seb Dovey, managing partner of Scorpio Partnership, the risk-profiling issue boils down to the management of client data and he in fact believes that this will be a key differentiator moving forward. “For me, the next decade is about data, data and more data…data is going to become king in the wealth business,” he said. In his view, capturing all the business benefits which enhanced risk-profiling can bring is about “making your business a better knowledge management company” and recognising that risk-profiling “is not a something static”.

Dovey also noted that it may be time to adjust the positioning of risk-profiling, both to clients and within the industry itself. “Let’s stop calling it risk-profiling as frankly that’s a passion killer,” he argued, suggesting that the term “opportunities profiling” might better encapsulate what the process is all about.

Of course, risk-profiling is at a very basic level about avoiding regulatory censure and it would seem that the industry still has some way to go in ensuring that it is fulfilling these requirements. By way of illustration Steffen Binder, co-founder and managing director at MyPrivateBanking noted that his consultancy had carried out a “mystery shopper” exercise a few years back which yielded some very disappointing results. Having sent “clients” with a hypothetical €1 million ($1.2 million) to invest to 25 firms, it was found that only two of them carried out a structured survey or questionnaire-based risk-profiling procedure. More shockingly still, nine of these firms – among which were international institutions – asked these mystery clients no risk-related questions at all. Having performed a similar (although unpublished) study more recently, Binder said the findings had been similar.

Contradictory variables

“Things haven’t changed really,” said Binder, “it’s a truly international problem.”  For him, risk-profiling needs to be revolutionised so that the various and often contradictory variables concerned can all be addressed. He explained that the first of these strands is the “relatively stable” amount of risk a client will have to take on to garner a certain return; the second is the “highly unstable” level of risk the client sees the market as representing; the third is their risk capacity, and the fourth is their risk tolerance. This last variable, in his view (and that of many academics now) is that risk tolerance is actually “a personality characteristic, which is actually quite stable.”

Binder emphasised that a “reading” which neglects any of these four variables may well be woefully inadequate in forming a “true” client risk profile – this despite the fact that these indicators might be highly contradictory. In his opinion, the industry needs to recognise that the relationship manager is acting “almost like a psychotherapist” helping clients to steer a course between these considerations. Watchers of the industry will of course be aware that the term “investment counsellor” is increasingly common in the US.

This theme of advisors guiding clients through a series of risk-return trade-offs was in fact prevalent throughout the event’s proceedings, as was an acknowledgement of the complexities this kind of risk-profililng entails. But despite the difficulty of taking risk-profiling beyond a mere box-ticking exercise, the panellists were united in their view that the effort is well worth it. “Enhanced risk-profiling is a challenge, but implemented well it can make all the difference,” said Ian Woodhouse, director within the EMEA private banking and wealth management practice at PwC. “It is complex, it is a challenge, but if it’s done well wealth management can move into another ‘golden age’,” he continued.

“Jumping the curve”

Woodhouse, along with the other experts, identified myriad business benefits which enhanced risk-profiling helps to capture, but one of the standout points was that it enables firms to show clients alternative investment strategies and specific products which may yield better results for them for the same cost (and risk). This may seem an ambitious use of risk-profiling data, but one that is eminently achievable for those wealth managers with the will to go beyond the bare minimum required for compliance. “If you can jump the curve, risk-profiling can provide an inordinate amount of competitive advantage…client risk and product risk alignment is a significant source of differentiation,” he said.

Coming at the issue from a technology and implementation perspective was Martin Engdal, who argued that although international watchdogs are undoubtedly flexing their muscles, “we would still be here even if it weren’t for regulatory pressures.” The “here” he refers to is a time where the battle for wallet share will be won by firms where “technology, people and processes” all need to be geared towards meeting clients’ expectations. “Missing clients’ expectations is the biggest risk we’re facing”, he said, adding that “there is no substitute for coming to a shared understanding of risk”. This idea of a “shared understanding” of risk actually came up repeatedly during the compilation of the research and would seem to be a neat summation of the disconnect which can all too often arise between client, advisor and institution. Risk-profiling in Engdal’s view is all about “setting, managing and monitoring client expectations based on a common understanding of risk – without that you lose the client.”

He also had a lot to say on the operational efficiencies which enhanced risk-profiling can capture, pointing out that efficient proposal generation and the rapid identification of “outliers” are just two of the “easy wins” here. But Engdal’s main theme was the fact that enhanced risk-profiling facilitates “open and fruitful conversations” where you can talk about risk and asset allocation with a clearly delineated purpose. Touching upon the educational function which risk-profiling can fulfil, Engdal echoed one of the key themes of the research report: clients who are empowered to understand risk and their own attitudes towards it better trust their institution more, and are likely to invest more money with them.

The debate in fact encompassed virtually every element of both client experience and business strategy, underlining the fact that risk-profiling is about far, far more than satisfying regulators’ concerns that clients may be put into unsuitable investment products. Compliance concerns may be driving change within the industry, but firms which can seize the initiative and “jump the curve” on risk-profiling are going to be the ones which will stand out, the experts agreed. Scorpio’s Seb Dovey summed up the tone of the event by remarking that “risk-profiling is finally having its moment in the sun”. The spotlight is now firmly on risk-profiling - whether the world’s wealth managers can stand the glare is another question. 

To obtain a copy of Beyond Box-Ticking: Leveraging Enhanced Risk-Profiling To Enhance Client Experience please contact

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