For decades, financial planners have based clients’ investment portfolio recommendations using an individual client’s risk profile as the basis for determining asset allocation. Of course, the real story behind risk profiling is so that the firm has some mechanism for controlling the process and justifying their asset allocation recommendations.

Now, the new paradigm emerging in the financial planning community is “objective based” investment. That is, to determine the client’s asset allocation based on the achievement of their investment objectives.

At Hewison Private Wealth (HPW), we have never supported the notion of risk profiling. In our view, basing an investment strategy on answers to a series of questions that are designed to test the client’s attitudes to investment risk is not a good strategy. Since when does risk equate to performance or desired outcomes?

It is ludicrous to suggest that someone who is completely inexperienced in investment matters can somehow self-determine how they will react to risk situations. Even more absurd is the design of strategy which is solely based on this mechanism without any reference to the individual client’s desired financial outcomes and time horizons.

Our view is that the skill of a professional planner is to assess the desired financial outcomes for each client and then design an appropriate strategy that is most likely to achieve those outcomes, with the least amount of risk exposure. It is then the planner’s role to actively manage the strategy and to make sure that the client fully understands the progress and the risks involved.

The current shift of focus to objective-based-advice is because the failures of risk profiling have been exposed through the GFC and in reaction to the FoFA review. As a result, the industry is looking for a new hook upon which to hang its hat.

HPW has been using objective based advice for more than 25 years and it takes a lot more than shoving clients into a portfolio of “objective based” investment funds and hoping for the best.  It takes hard work to constantly monitor, re-balance, manage cash flows and manage client expectations.

Basing financial advice on product selection and performance has never worked and won’t work in the future. As for risk profiling…I challenge you to show me anyone who is happy to lose money.