Financial enterprises often apply different risk profiles when offering and managing investment products. When they do use similar risk profiles, these are often elaborated differently, which means that the risk and return of such risk profiles will differ. Finding a solution to the differences in names and elaboration of risk profiles in the market is of great concern to the AFM. It has therefore developed a standard classification for these profile names, which it presents to market parties for consultation.
We would like to receive your response to this consultation document on 1 February 2010 at the latest at firstname.lastname@example.org
The AFM is of the opinion that it is in the interest of the client if market parties make use of the standard classification to the greatest extent possible, or indicate how their profiles fit within this classification. This applies to both advisors and to providers of investment products. Mutual comparability of advice and products, and finding appropriate capital accumulation will become easier as a result of this classification. And, on the other hand, it leaves sufficient space for advisors and providers to distinguish themselves in the perception of the client and in the elaboration of suitable investments.
The standard deviation can be used as risk/return ratio (as volatility indicator), together with the return that is in line with the aforementioned client information. Investments (portfolios, collective investment schemes and funds) also have a risk/return ratio. The client's risk/return ratio and the investments have to be in line with each other.
Financial enterprises currently describe the risk/return ratios in various ways. Descriptions of 'Risk profiles' as 'defensive', 'balanced' and 'aggressive' are often applied for this purpose. Such risk profiles are mainly intended to indicate a 'degree' of risk or return.
Not all financial enterprises apply the same (classification of) risk profiles. Where the same risk profile is applied, it can be established that the ultimate elaboration differs in risk and return. This means that a 'neutral' risk profile of one financial enterprise cannot be compared, or cannot easily be compared, with a 'neutral' risk profile applied at another enterprise. It is also possible that because of the above situation, unsuitable advice is provided or unsuitable services are provided on the basis of apparently the same risk profiles.
The AFM has therefore developed a standard classification of risk profiles which is linked to fixed bandwidths of a degree of risk, the standard deviation (as volatility indicator). Those risk profiles have been classified as A to F. Terms such 'aggressive' and 'defensive' were deliberately avoided, because consumers may have certain (unjustified) expectations in respect of these terms.
Naturally, such a classification only works if providers of investment products and composers of investment portfolios are actually able to indicate in which profile their 'product' fits, as regards the standard deviation. This way the advisor can easily provide a suitable elaboration to achieve the desired capital accumulation.
A standard classification is only standard if market parties that use the standard classification use the same basic principles and calculation rules to determine the standard deviation. The consultation document provides an explanation of these calculation rules.
Following, and partly depending on, the input provided by this round of consultations, the AFM expects that this standard will be broadly applied by financial enterprises by the middle of 2010. Financial enterprises that make use of their own risk classification will, at that time, be required to indicate how it corresponds to the standard. The AFM will, partly on the basis of the responses received during this round of consultations, determine whether the standard will be introduced to the market by means of a guideline or in another way (possibly a policy rule). The AFM will naturally devote attention to the use of the standard in the course of its supervision.
The AFM promotes fairness and transparency within financial markets. We are the independent supervisory authority for the savings, lending, investment and insurance markets. The AFM promotes the conscientious provision of financial services to consumers and supervises the honest and efficient operation of the capital markets. Our aim is to improve consumers’ and the business sector’s confidence in the financial markets, both in the Netherlands and abroad. In performing this task the AFM contributes to the prosperity and economic reputation of the Netherlands.
The AFM is committed to promoting fair and transparent financial markets.
As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.