OSC Investor Advisory Panel Releases Research on Risk Profiling

TORONTO – The Investor Advisory Panel, an independent committee of the Ontario Securities Commission, today published Current Practices for Risk Profiling in Canada and Review of Global Best Practices, independent research prepared by Shawn Brayman, President of PlanPlus Inc., along with co-authors Dr. Michael Finke, Texas Tech University; Ellen Bessner, Babin Bessner Spry LLP;  Dr. John E. Grable, University of Georgia; and Dr. Paul Griffin, Humber Institute of Technology and Advanced Learning.

In March, 2015, PlanPlus Inc. was engaged by the Investor Advisory Panel to perform research into the current practices in the Canadian marketplace that are used to determine a client’s risk profile and to evaluate these practices compared to best practices globally. The research focused on the practices of investment advisors and firms, including those licensed and operating under the Mutual Fund Dealers Association of Canada (MFDA), the Investment Industry Regulatory Organization of Canada (IIROC) and portfolio managers (PMs).

This report is a summary of the outcomes of that research which is comprised of: an academic literature review; a regulatory review that included Canadian and international regulators; a review of current solution providers; and a review and analysis of current practices in Canada. The latter included a survey of investment advisors’ use of a standard risk assessment questionnaire (responses were received from 338 advisors);  a similar survey of firms and their compliance departments; and an analysis of 36 risk profiling questionnaires currently in use by a variety of firms in various sectors of the industry.

Risk profiling is a complex, multi-dimensional process that combines many factors, both subjective and objective, to create a ‘risk profile’- an overall assessment of the most appropriate level of risk for a consumer/investor. The research found overwhelming evidence that the issue of assessing a client’s risk profile and recommending suitable solutions is a primary area of concern in the industry. Every regulator interviewed as part of this project rated determining a client’s risk profile as being of “high importance”. 

The research found:

• There is a confusing and universal lack of existence or consistency of the definitions of risk concepts and a lack of understanding of the factors involved in risk profiling.
• Almost all regulators surveyed are principles-based and provide little guidance on how a firm or advisor should arrive at the determination of a risk profile. They all recognize and rely on the professional judgment of the advisor and the ‘process’ created by the advisor or firm to determine a consumer’s risk profile. No regulator provides clear guidance on how to combine the multiple factors and form a client risk profile.
• Risk questionnaires are most widely used in retail channels using mutual funds and less so in wealth management and portfolio manager channels.
• Over 53% of respondents to the advisor survey indicated that between 76-100% of their clients had completed a risk questionnaire. Almost half of the firms reported that risk questionnaires were developed in-house and another 36% said that advisors could choose their own risk profiling methodology. Only 11% of firms could confirm that their questionnaires were ‘validated’ in some way.
• Most of the questionnaires (83.3%) in use by the industry are not fit for purpose - they have too few questions, poorly worded or confusing questions, arbitrary scoring models, merge multiple factors (75%) without clarity or have outright poor scoring models. Fifty five percent had no mechanism to recognize risk-averse clients that should remain only in cash.

The research report offers examples of best practices in other jurisdictions and concludes with recommendations for regulators, industry and the academic community.

“Risk profile assessment is key to a successful Know Your Client (KYC) Suitability process”, said Ursula Menke, Chair of the Investor Advisory Panel. ” 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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For Media Inquiries:

Shawn Brayman
PlanPlus Inc.
705-324-8001
[email protected]


Connie Craddock
Investor Advisory Panel
[email protected]