Securities regulators should look at bolstering the investment industry’s standards and training for assessing investors’ risk tolerance properly, recommends a report published from the Ontario Securities Commission’s (OSC) Investor Advisory Panel (IAP) published on Monday.
The IAP, which is an independent committee that the OSC funds to represent investors’ interests, issued the report on a roundtable held in September 2016 to discuss the results of research on investor risk profiling that the IAP commissioned in 2015.
The IAP’s research, which was carried out by PlanPlus Inc., found that most risk-profiling questionnaires are not “fit for purpose” and that many of these tools use arbitrary weightings, have poorly worded questions and aren’t capable of identifying risk-averse investors. Despite these flaws, these tools are widely used in the investment industry.
The roundtable, which the IAP organized jointly alongside the OSC’s Investor Office, was held to examine that research and the issues it highlights. Roundtable participants included investor advocates, the financial services sector, regulators and academics.
The report on the roundtable notes that participants in the session generally agreed that regulators should establish minimum standards in this area and that advisor training should be boosted to improve their proficiency in risk-modelling and risk-profiling.
“Technology, including productivity tools, has the potential to enhance the effectiveness and efficiency of the risk profiling process and help to better educate advisors and their clients,” the IAP’s report says. “[Technology] can also be a game changer because it facilitates the investor’s empowerment and direct involvement in their investments and changes the relationship between the client and the investment advisor, thus increasing the client’s responsibility in the relationship.”
The role of compensation models in the risk- profiling process should be examined too, the report says, adding that one of the fundamental challenges is the industry’s view of risk-profiling as a “necessary evil … [but] risk-profiling should be viewed as a foundational element of the optimal relationship between the client and advisor.”
Ultimately, the report finds that regulators, the industry and academics all have a role to play at improving risk-assessment processes.
Photo copyright: bolina/123RF