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Risk profiling study reveals a universal lack of consistency

By Andrew Rickard | November 16 2015 01:48PM

Most of the risk profiling questionnaires used in the financial services industry today are not up to the mark, according to an advisory panel appointed by the Ontario Securities Commission (OSC).

On November 12 the Investor Advisory Panel (IAP) an independent committee appointed by the OSC, published its report on current practices in investment risk profiling. It found that there is a "confusing and universal" lack of consistency in the way risk concepts are defined, as well a lack of understanding of the factors involved in risk profiling.

The panel also notes that most provincial securities regulators do not provide advisors with appropriate guidance on how they should determine a client's risk profile. Instead, regulators rely on the advisor's own judgement and whatever process the advisor or dealer has established to determine a consumer's risk profile.

The processes that are in place were not at all to the panel's liking: 83% of the questionnaires currently in use by the industry were deemed inappropriate. The report says most of the questionnaires advisors are using have "too few questions, poorly worded or confusing questions, and arbitrary scoring models". They also merge multiple factors without clarity or have "outright poor" scoring models.

"Risk profile assessment is key to a successful Know Your Client (KYC) suitability process", comments the panel’s chairwoman Ursula Menke. "We have asked the OSC's Investor Office to coordinate with PlanPlus Inc. to offer briefings on the research findings to members of the Canadian regulatory community and to industry members and representatives to ensure that these findings are well known and understood. The IAP hopes that regulators and industry participants will use the information in the report to build better, more robust client risk profiling systems."

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