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Risk Profiling

Risk profiling – not the be all and end all to your investment strategy

JTB Studios
Private Client Adviser
13 Apr 2012

It’s interesting that most players in the financial advice space – including the regulator to some degree,  hang their hat on risk profiling as a basis for determining strategic planning, investment portfolio design and as a determinant of investment selection based on perceived attitude to risk.

Risk attitude is usually determined by the client answering a series of questions, the answers to which will provide a score that will establish their degree of risk aversion.

The problem is that humans are emotional beings and their attitudes will alter markedly influenced by changes in their environment – particularly volatile investment markets.

We are currently seeing a massive bias toward fixed interest investment and a general attitude amongst advisers to recommend a pronounced overweight to cash deposits of various types. This is in an environment of falling interest rates and historically low interest rate returns and a world emerging from recession.

Many years ago, a very senior figure, at what was the equivalent to ASIC at the time, once said to me that sooner or later, an adviser would be held to account for taking an overly cautious approach to investing, that resulted in the client failing to sustain financial viability over time. In other words, accountability for damages suffered due to the adviser slavishly following a risk profile response, without taking the clients financial objectives into account.

Of course, in our two-tiered master/agent licensing system where the licensing entity can be responsible for the actions of literally thousands of advisers, mechanisms like risk profiling tools are used as a risk management tool for the licensee to ensure adherence to a uniform process for investment selection. However, this is hardly a recipe for tailored personal advice and strategic planning.

We fervently believe that strategic and investment planning must be tailored to the individual, based on the client’s stated objectives. The degree of risk (or potential volatility) involved with the strategy should then be fully explained to the client and amendments made in light of the client’s attitude to the proposed strategy.

In many cases, clients who are initially reluctant to invest in potentially volatile markets will gain confidence over time due to familiarity and awareness. Alternatively, the strategy may need to be made more conservative due to changes in circumstances. It is clearly a vital role for the adviser to manage the client on a continuing basis to ensure that their strategy remains appropriate to their needs and they fully understand the ramifications.

I firmly believe that basing a long term investment strategy on an initial “risk profiling” questionnaire alone is an inappropriate and unreliable mechanism. Investors should be concerned if their adviser doesn’t put their financial objectives at the heart of any financial strategy. It should sound alarm bells and is a cue to let your feet do the talking.  

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.