Right Adviser, Wrong Product?

Advisers may think they are recommending the best products, but what do their clients think of the advice?

Clients feel their advisers recommend products that don’t fit their risk profiles, according to research from Cerulli Associates. A brief risk-profile questionnaire with five or six questions is what most advisers use to determine basic information about their clients, such as the client’s time horizon and reactions to different market cycles, said Patrick Newcomb, a senior analyst at Cerulli Associates. “In many cases, this is the only interaction before determining the risk model that parallels the appropriate asset allocation,” Newcomb said in the first-quarter issue of “The Cerulli Edge-Managed Accounts Edition.”

The interaction typically does not yield enough information to create a long-term investor profile, which could cause the adviser to misjudge a client’s actual risk tolerance, Newcomb explained.

“Our adviser and client research reveals a significant disconnect between the percentage of advisers who believe their clients have an aggressive risk level (26%) versus what clients actually report (8%),” Newcomb said.

While some advisers develop a thorough understanding of a client’s needs through regular meetings, others implement an investment policy statement (IPS), which allows the adviser to learn more about a client and assist in taking action through market volatility.

“It’s a time-consuming process for both clients and advisers, sitting in a meeting, going back and forth,” Newcomb told PLANADVISER. The process of creating an IPS is a more in-depth profile, and because of the time involved, there might be less of a push for it. Risk profile questionnaires can range from five to 15 questions. There is no standard format, Newcomb said, and firms use them to profile clients and assign them into what they feel is the correct asset-allocation model, generally one of five or six models ranging from conservative to aggressive.


The risk profile questionnaire can be a step in the right direction. “But the IPS sets expectations for advisers and their clients,” Newcomb pointed out. “How often should client and adviser meet? How often is the client responsible for reading the statement, notifying the adviser of life changes? It’s a deeper dive into the adviser-client relationship.”

While the process of creating the IPS can be eat into an adviser’s time, Newcomb points out the benefits, not the least of which is enhanced communication between client and adviser. If a client is reporting very low risk tolerance, the adviser is probably encouraging the client to move more into equities and out of cash and fixed income. The IPS sets out the client’s goals and the strategies client and adviser will take to meet them, such as building a portfolio, or how the adviser might use third-party vendors; when vendors are vetted. “It lays out more about the process,” Newcomb said.

Client satisfaction is one benefit of the IPS, and another is understanding the client better. There is value is having a client in the correct investment model, Newcomb pointed out. “It’s another value-add the adviser can offer.”

The industry argues that financial advice is a competitive market in which investors are free to choose the option that they believe is best for their circumstances, the report said. But without an agreed-upon evaluation framework , it is almost impossible for investors to do so.

More information about Cerulli’s Managed Accounts Edition is here.