Financial advisers’ risk-based processes were flawed, Milliman practice leader Wade Matterson said yesterday.
While advisers were “burdened with compliance issues”, they needed to move from the “oversimplified risk-profile model” to determining clients’ goals, Matterson told the Actuaries Institute Financial Services Forum.
The flawed risk-profile approach typically asked a client if they would tolerate negative returns for three years, or five years, or seven years, “but the flaw is that the approach does not ask what size of negative return will be tolerated”, he said.
The risk approach “exists for compliance”, so advisers could show they had put a client into the appropriate option for their risk profile, he said.
As well as compliance burdens, advisers lacked the tools and the analytics for a goal-centric approach, which took into account a client’s needs for four things: income, capital, liquidity and bequests.
Matterson said this changed approach needed an industry-wide education plan for the public and advisers.
“We as an industry need to have this conversation with advisers to see how they are working because many of them are trying to move away from the linear structure of the risk-based approach,” he said.
Milliman was working with a number of large dealer groups to “get the pieces of the puzzle that are lacking into place”, he said.
