Dear CEO Letters: Suitability and Risk Profiling

by | Oct 18, 2013

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By Matthew Hunt, Prospect Wealth Management dear ceo


In 2012 the FSA identified “significant widespread failings1[1]following their review of a sample of 16 wealth management firms providing investment management services. The review found nearly 90% of firms in the sample were judged to pose a “high or medium-high risk of detriment to their customers2” due to a high risk of unsuitability.


The FSA went on to list some of their key areas for concern, including:

  • Inadequate risk profiling3
  • Inconsistencies between portfolio’s and the clients’ attitude towards risk4; and
  • Inconsistencies between portfolio’s and the clients’ investment objective5

Such widespread failings are, no doubt, of serious concerns to private client advisers, who are expected by clients to introduce leading managers to protect and increase their wealth.

Everyone is familiar with the 3-portfolio approach to risk management, i.e. low, medium and high. However what is medium risk for one client may be considered low risk for another, and high risk for yet another. Somewhat unsurprisingly the majority of clients end up in the medium risk category. Matthew Hunt, founder of Prospect Wealth Management, points out that whilst CIO at a major international asset manager, some 16,000 out of 17,000 clients were classified as requiring “medium risk” portfolios.  However, any objective review of attitudes to risk would show that it is highly unlikely that 90% of clients would all want the same risk profile.  In practice this is reflected in different client portfolios having different asset mixes and different holdings, despite having the same “medium” risk description. The result is that one “medium” risk portfolio may out-perform, whilst another under performs. The FSA therefore is entirely correct in raising concerns over the suitability of investments held within discretionary managed portfolio’s.



Since inception in 2006, our client Prospect Wealth Management has sought to distinguish itself from the mainstream of wealth managers and DFM’s by providing a clearly defined investment service to clients.  Prospect’s proprietary client profiling process ensures that:

  • Investment time horizons are clear and understood
  • Risk is clearly explained, by quantifying worst case outcomes over different time horizons
  • Investment return objectives are quantified and aligned with risk tolerances

As a result, the “Medium Risk Portfolio” does not have a place in Prospect’s offering. Rather clients portfolio’s are built to match their specific profile.






Importantly, by using model portfolios (bonds, UK equities, international equities, alternative investments), Prospect is able to ensure consistency throughout client portfolios and as such every client benefits from the manager’s “best ideas”. This is significantly different from the traditional stock-broking model, where portfolio’s in the same risk band (itself a fallacy) can be entirely different.

The way in which the manager builds client portfolio’s allows Prospect to provide accurate (composite) benchmarking to each client based on their portfolio, so that they have one number against which they can judge the performance of their portfolio.




The answer is simple: there are no fees in the benchmark, so it is hard to outperform a market benchmark. Whilst outperformance can never be guaranteed, Prospect are confident that their contrarian investment process, based on value and momentum, will deliver outperformance over the medium term.  Prospect are therefore happy to use a market composite benchmark, providing a higher level of transparency than is the norm in the investment industry.





[1],2,3,4 and 5 taken from Dear CEO: Wealth Management Review Letter, Aug 2011.


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