Risk profiling is a complex, multidimensional process that combines many factors, both subjective and objective, to create an overall assessment of the most appropriate level of risk for an investor.
The Investor Advisory Panel (IAP), an independent committee established by the Ontario Securities Commission, has released a report on the risk-profiling roundtable that it jointly organized with the OSC Investor Office on September 28, 2016.
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The report highlights a need for advisors to educate clients about the risk of loss and the relationship between risk and return.
“[I]t is quite dangerous when a client misunderstands that intentionally taking on more risk necessarily results in a greater return,” the report says. “Advisors need to be aware of and ensure that they develop the competencies required to lead an effective risk profiling interaction.”
Further, advisors should educate clients about the “benefits of the KYC process and of the client’s responsibility to proactively keep the risk profile up to date, such as alerting the advisor of a material change in circumstances.”
Advisors should also assess a client’s ability to make sound risk-profiling decisions or at least respond to observations of a client’s inability to perform their role in risk profiling.
The roundtable was held to explore the findings of the IAP’s 2015 research report on the risk profiling used in the retail investment advice process and to provide recommendations on possible next steps to improve risk profiling.
The report indicated general support among roundtable participants that:
- stakeholders should work together to develop a holistic response to the challenges they face rather than use traditional siloed solutions according to segments of the sector or types of investments;
- it is critically important to consider the need for and develop all constituent groups’ understanding of, and buy-in for, the types of improvements that are needed;
- part of the challenge is to change the perception of the risk-profiling process to a foundational element of the optimal relationship between the client and advisor; and
- more cross-sector conversations like the roundtable would be helpful.
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Roundtable participants included investor advocates, financial services industry members, government and regulatory representatives, academics and members of the report team.
The facilitator’s roundtable report is here. For more information on the roundtable, please see the risk-profiling roundtable discussion guide. For additional information on the scope and objectives of the IAP research project, please see this outline.