Here's what you need to know about the regulatory requirement of assessing client risk tolerance in America, and how Stackup helps you meet it
In America, the requirement for advisors to determine their client’s risk tolerance is set out in FINRA Rule 2111
In 2012, FINRA emphasized the importance of assessing risk tolerance by explicitly adding it to Rule 2111 via Regulatory Notice 12-25.
FINRA Rule 2111 requires firms to have a “reasonable basis” to recommend an investment, which includes the requirement to assess “risk tolerance” as part of the customer’s investment profile.
FINRA is currently reviewing how firms are assessing risk tolerance as part of its emerging regulatory issues review
While FINRA is currently in the process of investigating risk tolerance tools, other global regulators have recently completed this process and found grave issues with risk assessment practices.
In the U.K, the Financial Conduct Authority found that 82% of risk profiling tools analyzed “had weaknesses which could, in certain circumstances, lead to flawed outputs.”
RiskTRACK has been statistically validated, meaning our methods will stack up to regulatory scrutiny
We offer a risk profiling system that is internally robust and externally predictive of a comfortable portfolio allocation. Our methods are academically and scientifically based and not just thrown together to tick a box.
Our reports allow you to discuss your client's risk profile with them before signing off. This ensures that they are comfortable and agree with your assessment, lowering the risk of rebuttal down the track.
Deficient risk tolerance assessments are currently under regulatory scrutiny in America due to the broad scope for incorrect assessments to lead to poor consumer outcomes. As FINRA hasn't yet released its findings, we've provided some recent statistics from the U.K regulator.
of FCA reviewed tools were deficient
complaints about discretionary accounts in 2017
of suitability failures were due to incorrectly assessed "attitude to risk"