Through switching to Truth software (a form of cash flow modelling) we can now work out how much annual return a client requires to do all the things they want to do in life and never run out of money. Often the annual rate of return required can be very low – or even negative. New types of this cashflow software are appearing all the time – Voyant being an example of an American firm coming to the UK. It does take time and effort to learn these systems and how to apply them.

They are not as expensive when compared to losing even one case with the FOS for not correctly matching a plan/fund to the client’s risk profile.

Most advisers, when seeing a client with a say ‘6′ risk score, will set up a balanced portfolio that meets the risk score ‘6′ when, if they had carried out a real risk assessment using the cashflow approach, a no or low risk investment approach is all that was required.

Those firms having a risk questionnaire and scoring system are, from a compliance viewpoint, in a much better place than those who rely on the client ticking a box on a scale of 1 to 10, but should not be complacent as often they are selling equities, stress and risk when no or little risk is required by the client.

I remember back in 2004, the FSA asked me (when I used to use the tick box approach) these questions:

1. What do you think Mr and Mrs C understood by a risk score 4 out of 10?
2. What do you understand to be a 4 risk?
3. What questioinnaires, risk tools and sales aids did you use to establish risk? (please supply samples)

The firm I worked for lost the above case at the FOS owing to a lack of structured risk profiling being in place.

I have successfully claimed compensation for clients against the banks who, despite the tens of thousands of complaints they receive (see FOS statistics for the first 6 months of 2009 and weep), still seem to struggle to match products and funds to an investors’ risk profile or to ask the right questions in the first place.