It is becoming increasingly clear that suitability sits at the heart of the regulatory focus on the customer. The FCA is there to guide the industry through the regulatory minefield, but exists primarily and quite rightly to protect the consumer.

The industry has sought to comply with this drive whilst maintaining efficiency around the provision of investment advice and the resultant software and related processes have ensured that sound financial advice is not the preserve of the super-rich.

Making financial advice cost effective and available to all has keen cross-party political support, particularly as the wider implications of new-found pension freedoms become apparent, but the regulator will keep a weather eye on the use of tools in the advice process to ensure that consumers' best interests are always served. TR (Thematic Review) 16/1 fired a clear warning shot in this regard.


Attitude to Risk (ATR) tools and associated stochastic modelling programs are now commonplace in the industry and form an integral part of the advice process for many adviser businesses.

Indeed, so much so that they have spawned a mini industry in their own right and there are now a growing number of suppliers of risk profiling software that help to quantify a client's attitude to risk and appetite for loss.

To give the process efficiency, the resultant output needs to match to an investment solution that meets both the client's risk score and importantly, their desired investment outcome. This is the key link between risk assessment and product suitability and invariably revolves around a strategic asset allocation (SAA) engine.

The concept is simple in theory: as poor a measure as it is, in portfolio terms risk is defined by volatility or standard deviation. It is, therefore, possible to create a series of risk profiles that are defined by upper and lower levels of volatility. Manage a fund or portfolio within these boundaries and the client has an investment that matches their attitude to risk.

To make this even simpler, ATR tool providers have back tested asset allocations that are designed to meet these volatility boundaries over three to five year rolling periods. Product manufacturers either target or closely map to these asset allocation outputs to ensure compliance and aid the suitability process.


Life companies and asset managers have been quick to identify this trend and the vast majority of multi asset funds, model portfolios and fund-of-funds launched in the last five years are now risk rated by the tool providers to facilitate a smooth transition from establishing a client's attitude to risk to defining suitability of product.

This has further precipitated in the burgeoning 'advice light' market that is aimed, in many cases, at the sub mass-affluent segment that has proved so difficult to service following the retail distribution review. Whether employed in this arena or in a full fat service, advice is advice from a regulatory perspective and it is as crucial that advisers fully understand the mechanics behind the tools they use to give that advice as it is to understand the products and funds that they recommend.


The approach to advice adopted by many advisers utilising risk and asset allocation software may be summarised as: risk profiling tools, risk mapping tools, strategic asset allocation, goal validation.

It is quite clear, however, that while tools can help to inform, they must never be used as the sole arbiter of suitability. The regulator has expressed concern that software has, in some circumstances, been relied upon too heavily in the justification of product selection.

Suitability should always be established through a process of dialogue with a client, for which ATR and SAA tools may act as a guide, but best practice dictates that they should never ultimately define the resultant advice. As with all regulated activity it is critical that advisers are fully conversant with the processes and methodology employed by the tools that they use to serve their clients.

It is beholden upon advisers to analyse the various offerings available - their benefits and limitations - and to provide an objective rationale for the selection of their tools of choice.

SAA software employs models that rely upon advanced statistical techniques and a sophisticated assessment of financial markets, but by definition a model is a simplification of reality and these models cannot and do not predict the future.

They may be a step up from traditional rules of thumb in financial planning, but they act as no panacea. These models can only ever approximate the likely behaviour of financial products and can only act as a guide. Care should be taken to ensure that they do not create a false sense of security for advisers and their clients.

This point is clearly made by the regulator in both TR 16/1 and in the 2011 guidance paper from the FSA 'Assessing Suitability'. For any adviser business that has ATR and SAA tools at the heart of its suitability process a re-read of both of these documents is probably a very good idea.

This article first appeared in Zurich's Advice Matters.