POOR RISK PROFILING PUTS YOUR ADVICE AT RISK

Are you a risk-taker?

Most of us in compliance would probably place ourselves somewhere between “naturally cautious” and “I’ll wait for three sources before crossing the road.” But there is something oddly admirable about a client who breezily announces they’re ready to “put it all on red.”

Big risks can bring big rewards, but they can just as easily wipe out years of patient planning.

That tension sits at the heart of good risk profiling. When advisers handle it well, clients walk away with investment strategies that genuinely reflect their goals, tolerance, and capacity for loss.

Done poorly, risk profiling can quickly unravel the quality of a recommendation and put the client at risk of harm or poor outcomes. Not to mention raise every shade of red flag during a file review.

Yet we still see firms leaning on vague, generic descriptions or relying too heavily on a questionnaire score to carry the weight of the suitability assessment. A risk profile needs to be richer and more personal than that. You cannot understand a client’s relationship with risk by ticking a few boxes, any more than you can understand their retirement plans by asking how they feel about golf.

What does a good risk profile look like?

This is where things get interesting. The FCA does not prescribe the format or dictate how firms must conduct risk profiling.

This flexibility is helpful, but it also means advisers need a framework that reflects their own advice model. It should tie firmly into Consumer Duty expectations and integrate seamlessly with the wider suitability process.

Many firms will use a risk profiling questionnaire, but this is not mandatory. Some use them well, however, for others they become a substitute for meaningful discussion.

On their own, questionnaires can actually create problems, especially when they produce a score that doesn’t align with the conversation, the goals, the client’s broader situation, or the firm’s investment proposition. A questionnaire should inform the discussion, not define it.

A good risk profile should sit naturally alongside the rest of your KYC. It’s not an isolated document, but part of a coherent narrative about who the client is, what they’re trying to achieve, and how they think and feel about volatility. Ideally, it should contain the client’s own words, because this offers authenticity and helps demonstrate that you explored more than abstract concepts of risk and return.

We often see phrases such as, “you are aware markets can fluctuate and are comfortable with 30% volatility a year.” It looks reassuringly tidy on paper, but its meaning varies dramatically depending on the client.

A seasoned investor who has lived through market cycles understands what that level of movement feels like in pounds and pence. A new investor, or someone whose only exposure has been a workplace pension they never actively engaged with, may have no real sense of what volatility would mean in practise. They may agree with the statement because it sounds reasonable, but without living those swings, their “comfort” is theoretical at best.

This gap between expectation and reality is precisely why the FCA separates knowledge from experience within the rules.

Calculated risk

Most clients seeking investment advice accept that some level of fluctuation is inevitable. The real question is how much risk should they take, rather than how much they think they can. These are not always the same.

Advisers must navigate the delicate balance between appetite, capacity and need. A client may have the enthusiasm of a day trader, but lack the financial cushion to withstand losses. Another may have ample capacity, but little emotional tolerance for seeing their investments fall. And then there are clients who say they can cope with losing 20% right up until they actually do.

A good risk profile doesn’t just measure tolerance. It explores the interactions between the client’s objectives, financial position, time horizon and behavioural tendencies. When these elements align, suitable advice becomes far easier to deliver and clients tend to feel more confident in the journey ahead.

Strategies for proper alignment

Advisers who take time to show clients how different portfolios may behave across market conditions often uncover gaps between perceived and actual tolerance. These insights help prevent future misunderstandings and strengthen both suitability and Consumer Duty outcomes.

It is also worth remembering that past performance should not become the anchor for these conversations. Clients can be heavily influenced by short‑term headlines or the lure of recent winners. Your role is to bring them back to fundamentals – the risk/return profile that aligns with their needs, the time horizon for their goals, and the long‑term impact of costs, charges, and tax.

Risk is not static. Major life events, shifting goals, or market conditions can change the suitability of a portfolio. Regular reviews offer the chance to reassess, recalibrate and reinforce understanding. A portfolio that fits today may not fit tomorrow. That is not a failure, but a natural part of long-term planning.

If you would like support strengthening your own risk profiling framework or sense-checking your files, don’t hesitate to contact us on (0161) 521 8641 or email: info@b-compliant.co.uk