Andrew Fung of Hang Seng Bank explains some of the ways to address concerns over suitability by ensuring an appropriate match between clients’ risk profiles and the types of products they are sold.
Date: June 2010
Tags: Suitability, Risk profile, Risk appetite
Determining appropriateness
The main factor in determining which types of products are most suitable for individual customers should always be their risk appetite, said Andrew Fung in an interview.
For example, he explained, for banks such as Hang Seng which have very conservative clients – and who therefore might be more suited to capital-preservation type instruments – then low-risk products are more appropriate.
This would likely mean that advisers should look to sell these customers high-grade bond funds or blue-chip bonds rather than non-investment grade funds.
Following the financial crisis, Fung said that risk profiling is the major factor rather than the product itself – regardless of the features of the individual product.
Product and client-based risk appetite matching are the driving factors for each institution when choosing which products to “put on the shelf” and sell to customers, he explained.
Changes to risk profiling
For Hang Seng Bank, risk profiling has always been a major requirement, said Fung, even before the various regulatory changes in the wake of the financial crisis.
Given that the bank and its customer base are conservative in nature, categorising customers into low, medium and high risk has been the approach for many years.
The only change now, said Fung, is the move in Hong Kong to using five risk categories – labeled 1, 2, 3, 4 and 5 – under the new regime.
As a result, there is some fine-tuning required to train wealth management staff in the accuracy required within the new regime, he added.
In general, Fung said the risk profiling guidelines are clearer now than before the Lehman Brothers Minibond crisis. The bank has therefore had to move from its own classification system to using the officially-designated classifications, but this has not resulted in any fundamental changes.
Changing investor psychology
At the same time, Fung said that investors are now more prepared to sit with sales staff for perhaps up to 30 or 45 minutes to enable them to explain the products.
So investors are psychologically prepared to listen more to their advisers, he added.
This makes going through the risk profiling process less of an issue when selling wealth management products, said Fung.
