Soft Facts and Attitude to risk

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Soft Facts and Attitude to risk
Compliant file report needs COMPLIANT CHURNING
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Soft Facts and Attitude to Risk

• COMPLIANT CHURNING
• Pension switches
• ISA transfers
• Mortgage changing lender
• Fund switches

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Matching Risk are you doing enough?

• Identifying risk
• Consistency
• Fact find report stochastic fund selection
• Specific for the product

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Matching Risk are you doing enough?

• Existing funds
• ISAs
• Cash ISAs
• Endowment complaints upheld means they MUST be
  low risk!

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Matching Risk are you doing enough?

• Critical in assessing making a recommendation
• Customer must understand what risk means.
• You know what it means, but do they?
• Attitude to risk changes over time, this must be
  reflected.

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Matching Risk are you doing enough?

• Soft facts

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Matching risk

• Essential that in suitability letter the
  recommendation is consistent with client's ATR
  understanding of risk. Both risk of product
  risk of client.
• This will improve quality of advice reduce risk
  of future complaints.

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What do you see?
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An open book of course!
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What do you see?

• What you understand as low to medium risk is not
  necessarily what the client sees
• And may definitely be viewed differently by an
  FSA visit or a FOS adjudicator!

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STOCHASTIC Planning

• Oxford English Dictionary definition-
• Randomly determined, having a random probability
  distribution or pattern that may be analysed
  statistically but may not be predicted
  precisely.
• From the Greek aim or guess

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Matching risk

• Do you use a scale, e.g. 1-10
• This may have little meaning to your client
• Different types of risk, i.e. Capital, inflation,
  interest rate, income, age, time horizon etc

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Matching risk

• Attitude to Loss?
• What is Loss
• Loss of capital
• Loss of Interest
• Loss of buying power
• failure to keep up with inflation

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Matching risk

• Must take account of existing portfolio
• Any discussions must be reflected in letter
• May have different risk profile for different
  objectives again must be specifically stated in
  letter

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Matching risk

• Categories of risk
• Low/medium/high or cautious/balanced/adventurous
• Examples in each category
• Must review these regularly
• Client must understand

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Matching risk

• Risk profiling/asset allocation tool
• Concern that some firms are getting final risk
  profile incorrect due to use of managed funds
• Duty to discover how each fund is made up
• Property bricks mortar v. equities
• If using this tool, then should be recorded on
  file.

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Matching risk

• Risk profiling/asset allocation tool
• Standard Life Stochastic planning tool?
• Skandia
• Scottish Widows
• Co Funds
• How good?

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Matching risk

• Risk profiling/asset allocation tool
• Standard Life Stochastic planning tool?
• Where was their Sterling fund?

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Matching risk

• Review
• Important to update any changes on Fact Find,
  dated why.
• Attitude to risk does change over time,
• Don't make assumptions,
• They could be expensive!

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Matching risk

• Review
• Important to update any changes on Fact Find,
  dated why
• Beware of First
• And other electronic fact finds that are updated

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Matching risk

• Disclosure
• Some clients may not want to disclose all their
  financial facts
• Can make it difficult to gauge whether the risks
  inherent with any recommendation are appropriate
  to their overall portfolio
• Need to make it very clear that any advice given
  is based on the information they are willing to
  provide

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Matching risk

• Advisers should never recommend an attitude to
  risk
• If a change in ATR has occurred need to explain
  in letter how this will impact on investment
  advice
• Maybe that ATR has changed for new money but
  client does not want to change entire portfolio
  to reflect that change if so must be recorded

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SOFT FACTS QUESTIONNAIRE

• How long before you expect to start taking
  retirement income?
• Enter a number of years.
• This time period is very important in the risk
  assessment process

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SOFT FACTS QUESTIONNAIRE

• Please explain what you wish to achieve prior to
  retirement?
• Do you have any emergency fund for unexpected
  expenses, so as to avoid drawing on medium to
  long term savings to meet immediate needs?

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SOFT FACTS QUESTIONNAIRE

• No/Yes but very small
• Less than six months salary
• Around one years salary
• More than two years salary

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SOFT FACTS QUESTIONNAIRE

• Why do you feel this amount is right for you?
• What is your expectation of your future earning
  to retirement

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SOFT FACTS QUESTIONNAIRE

• I expect my earning to decrease
• I expect my earning to keep pace with inflation
• I expect my earning to increase somewhat ahead of
  inflation
• I expect my earning to fluctuate
• I expect to retire shortly

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SOFT FACTS QUESTIONNAIRE

• Which statement most closely reflects your
  current financial situation?
• I am completely debt free
• I am mortgage free but have a few other
  obligations
• I have a reasonable mortgage but no other debts
• I have a mortgage and a few other obligations
• I have lots of obligations

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SOFT FACTS QUESTIONNAIRE

• What are your views and feelings about this?
• If you were advised that your current fund and
  future savings are not sufficient to meet your
  requirement goals, what action would you take?

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SOFT FACTS QUESTIONNAIRE

• Take more risk with all of the money to try to
  improve returns?
• Take more risk with some of the money and
  increase savings a little?
• Increase savings sufficiently to meet your goals?
  
• Amend your goals and make no change to the
  investment risk or savings levels

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SOFT FACTS QUESTIONNAIRE

• Which of the following statements best describes
  your other retirement provisions?

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SOFT FACTS QUESTIONNAIRE

• Only State Pension Benefits
• Modest amount of other personal and/or company
  pensions
• Substantial amount of other personal and/or
  company pensions
• Substantial amount of other personal and/or
  company pensions and other savings

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SOFT FACTS QUESTIONNAIRE

• What are your views and feelings about this?
• What future aspirations for self and family do
  you have, including such things as hobbies,
  holidays and plans in retirement?

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SOFT FACTS QUESTIONNAIRE

• What are your expectations of service and fund
  performance?
• Do you anticipate there being any changes within
  your job role or employment?
• What are your views in relation to current and
  future housing and, perhaps, downsizing?

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AFFORDABILITY

• Mortgages
• And
• pensions

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AFFORDABILITY

• Mortgages
• You will NOT get away with saying the provider
  and the client decides what is affordable!
• YOU MUST advise and so must have enough data to
  be able to do so.

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AFFORDABILITY

• Mortgages
• How detailed?
• 30 page questionnaire including cost of swimming
  pool maintenance
• 1 question can you afford it?
• Or
• Net left over.

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AFFORDABILITY

• Outstanding credit card debts at the end of the
  month
• Overdraft
• Cost of car loan
• How many months left or when does it expire,
  would you buy another car on the never never

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Soft Facts

• Hobbies
• Green Issues
• Private health
• Inheritance in
• Inheritance out
• Children grandchildren private education
  holidays extra tuition
• Private medical insurance

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Complaints

• If the client suffers any loss
• IT MUST BE YOUR FAULT AND YOU MUST PAY!!

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• Rebalancing portfoliosvs.Discretionary fund
  management

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• Platforms such as
• Skandia/ Transact etc...
• use as a selling point

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• Providers ask for client authorisation
• BUT
• how long ago did they sign it?

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• With auto-balance you can be undertaking
  discretionary fund management, i.e. you are
  switching funds without the client's knowledge

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Auto re balance

• If the FSA were to inspect this file, they might
  see that an auto-balance has occurred at end of
  Q3.2008
• Then when asked for the authority, note that this
  was signed by client in Oct 2006.

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• Our opinion would be that FSA would consider that
  to be discretionary management.
• RESULT very hot water!
• BE CAREFUL

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• Can get around it by confirming in the review
  letter that you send
• Unless I hear from you to the contrary, an auto
  rebalancing of your portfolio will occur to bring
  your portfolio back into line with your risk
  profile

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Compliant switches?

• Must meet a defined and recorded CLIENT
  objective.
• NOT an IFA objective.

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Compliant switches?

• NOT an IFA objective.
• You must advise but the advice must meet a
  client objective PRE DEFINED on a fact find.

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Compliant switches?

• PRE DEFINED on a fact find.
• Do not use
• You chose to.
• You decided.
• You selected.
• THE IFA MUST ADVISE!

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Compliant switches?

• Fund switch
• ISA switch
• Pension Switch
• Mortgage switch

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Compliant switches?

• Fund switch-ISA switch-Pension Switch
• Point out costs-
• Point out risks
• Must consider
• Stakeholder CAT standard? In house Managed
  fund
• Why your recommendation meets client objectives
  better

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Do the business!

• Bigger better file
• Bigger better fact find
• Bigger better risk

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Do the business!

• Bigger better file
• Bigger better fact find
• Bigger better risk
• NOT on paper!!!
• 100 ELECTRONIC!