There has been a 67% increase in the number of complaints relating to ISA providers ignoring their customers’ risk preferences.
The number of complaints received by the Financial Ombudsman Services (FOS) from customers whose fund managers have ignored their risk preferences rose from 280 in 2014 to 467 in 2015.
The figures indicate that the wealth management industry needs to do more to properly assess their client’s risk appetite and ensure the investor’s portfolio continues to match that risk profile.
We have invested in a number of areas to ensure our investors get a portfolio that is right for them:
- We use a sophisticated questionnaire for investors in order to accurately assess their risk – this includes employing leaders in behavioural economics to help design the algorithms used to assess risk appetite.
- We have a high level of diversification across asset classes to ensure that portfolios do not store up unwanted risk by overexposure to any one asset type.
- We regularly rebalance portfolio weightings to ensure that risk levels have not built up and no longer match the investor’s risk appetite.
- We target volatility levels rather than allocation to a particular asset class in portfolio composition.
It is imperative that investors are only exposed to levels of risk that they feel comfortable with. Part of the reason why people are under-investing in their pension is that they regularly get burnt by taking risks that they are unaware of.
When fund managers increase risk on investments above a level clients are comfortable with, this inevitably stores up problems for the future.
A lack of diversification, characteristic of many UK investment funds, may be partly behind the complaints. Risk automatically rises when investments are concentrated in any one market. Conversely, clients’ exposure to risk is immediately lowered when investments are allocated across multiple, uncorrelated markets.
Limiting investments to one market is the equivalent of putting all your eggs in one basket – the potential gains are high but so are the potential losses. The issue is that some fund managers in the UK do precisely this – which can sometimes make it difficult to consistently meet clients’ preferred risk levels.
MoneyFarm uses highly innovative technology to deliver top quality and transparent wealth management services, offering competitive returns at a low-cost. MoneyFarm’s new products are completely fee-free for the first £10,000 invested and for savings over £1m.