FinaMetrica, the independently-owned risk and suitability expert, is calling for the global financial services sector to adopt an industry agreed risk lexicon in its exclusive academically-researched report entitled ‘Moving Towards a Consistent Risk Language’.
Created in collaboration with economist and consultant Stuart Erskine and featuring input from Dr Andrea Vedolin of the London School of Economics, the paper examines how clear and consistent standards around the language of risk are essential for effective communication between the industry and its clients.
A wide range of terminology associated with both an investor’s risk tolerance and the wider concept of investment risk are set out in the paper as the starting point for what it believes will grow to become an industry-wide, workable vocabulary, all of which can be easily understood by the end consumer.
From here, FinaMetrica seeks to encourage relevant representatives from businesses across the financial services world to come together and form a Working Group, led by Stuart Erskine, in order to turn the initial concept of consistent risk language into a practical toolkit for the industry.
Commenting on the launch of the report, Paul Resnik (co-founder and director at FinaMetrica) explained: “The whole premise around investing is that you largely get paid a return for taking on risk. Yet, and bizarrely, there’s no agreed way for how the industry discusses risk with clients and no agreement on what different risk terms might mean. The end result is that any two people can derive very different meanings from the same risk concept.”
Resnik continued: “FinaMetrica has argued for a long time now that a sound understanding of clients’ risk tolerance can help discourage portfolio churn and, ultimately, ensure that financial firms keep their customers for longer. We see the standardisation of risk language as the missing link that can ensure there are no negative investment surprises for the customer by helping them to fully understand how the level of risk they choose to take on aligns with their own expectations.”
Stuart Erskine added: “Until now, there has been no single document or reference point that brings together all the different terms of risk. The conversation around risk language doesn’t stop here, either. The paper isn’t intended as a set dictionary of terms, but more as the outline for a vocabulary that’s designed to kick-off conversations in the industry so that we can start working towards agreed standards around how we talk to clients about risk. With this in mind, we invite readers to share their thoughts on the report before establishing a Working Group as the next step towards developing the first ever risk language for financial services.”