Mr Percival, a Chartered Financial Planner, was speaking at the Morningstar Conference in London this afternoon.
The independent consultant, who left the regulator last Autumn, gave a presentation entitled: Risk Profiling Tools: the good, the bad and the ugly.
Mr Percival believes approaches to capacity for loss are generally “frankly very poor”.
He has seen “all kinds of poor practice when it comes to capacity for loss”.
He said he “wouldn’t be surprised if the majority of firms” are failing on capacity for loss and he believes many are ‘confused’ as to what it actually means. He said it is very different to attitude to risk but some advisers were mixing the two together at times.
He said he has seen advisers have answered in their fact finds what clients’ responses are, saying, for example, minimal or no capacity for loss, but then sees they have recommend medium risk due to what it said on the risk profile.
A key solution for this problem is using cash flow planning tools, he told delegates.
He said: “Cash flow planning has to be a must for anyone in this scenario for retirement or getting to that stage.”
Is there an alternative? He asked attendees.
He said it was “all about numbers, working out the income to maintain standard of living - it’s a whole load of maths” therefore “why not use a maths tool, which is cash flow planning tool?”
Plenty of such tools take only 10-15 minutes to use so it should be ‘routine’ for retirement or at retirement clients, he said.
Mr Percival said there were three things the FCA is concerned about on clients’ risk profile assessments:
1. Results of tool appear to contradict client answers. If this is the case then advisers need to clarify that with their client and record that on file. If they don’t then they have contradictions on file, and fails to show suitability as a firm needs to do.
2. Clients answer in a contradictory way within the tool. One adviser said this happens all the time, Mr Percival said. For example, they say they prefer security of a bank account but then say they are happy with the risk of equities.
3. A lot of risk descriptions – which show how the firm is characterising a cautious investor or other categories - need to quantify the level of risk associated with that category. Mr Percival said he has seen a lot of cases where that had not been done. This is about trying to achieve, at that stage, what that investment journey might feel like if they went into portfolio associated with that category. He said it was very important to quantify this.
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In December Mr Percival told Financial Planning Today that many problems surrounding risk profiling that were laid bare in an FSA report six years ago still exist.
Read more on this HERE
He previously warned that there has been a lack of progress in the sector since the finalised guidance on assessing suitability in paper FG11/5 was set out.
He has strongly encouraged Financial Planning professionals to look at the document again.
In 2011, the FSA said the “level of failure in this area is unacceptable.”