Regarding product risk disclosure

I was just reading a document produced by the Society of Actuaries in Ireland regarding the above and would like to make some important points that are not addressed in this or any other document dealing with this issue.

Number 1

The amount of information required for an investor to own the decision is a function of the complexity of the product and the responsibility taken by the adviser/or and the investor. The more responsible the advisor/er and the less complex the product, the less information that is needed and vice versa. There is no mention of this dynamic in the report.

Number 2

There is a risk that simple product disclosure becomes the adviser/or know your product benchmark and in my opinion this is inappropriate in terms of making sure that advisers/ors truly know the component structure, dynamics and risk return profiles of products they are recommending.  I see “no work at all” into this side of the decision. The information requirements of the two cannot be the same unless both parties hold the same information and the same processing ability.  This is not a looking glass.

Finally, I was drawn to the comment regarding stochastic modelling of risk. The major stochastic risk modelling process that I am aware of is the monte carlo simulation of risk and return.  The problem with this type of process is that it assumes risk is a future outcome and not a starting position.   In a price dependent non general equilibrium world, risk is what is already built into prices in a way that does not fully reflect the realities of the underlying fundamentals.   If risk is latent, you need to measure it in some shape or form.

I am not against the use of stochastic modelling to show the potential distribution of outcomes under certain assumptions, but in order to convey risk in terms of that likely to impact the investor, we need to educate investors over valuation and other cyclical risks that can heavily influence the direction and the nature of risk and return.   Risk is both the now and the future.  Again, hat tip Ken Kivenko.

Leave a Reply