“How do you determine a client’s risk profile?”
“We see our primary role as financial planners as educational. We need to educate our clients as to the actual risks they need to address in formulating a financial strategy. There are various risks – risk of an unknown rate of return, the risk of losing their money, timing risk, the risk of needing to sell investments when the market is down and the risk of taking no risk and getting a low rate of return.
So we use the usual risk assessment tools – asking questions about these issues while we explain our view.
If clients address the need to manage and address all of these risks then a strategy can be put in place to ensure sufficient liquidity to meet anticipated and unexpected cash needs. Then we spend a lot of time trying to ascertain their time horizon. In our experience, many clients do not understand the difference between risk and volatility. Once they really understand this, then we do not have too much trouble in setting up an appropriate portfolio structure.
Most dealer groups have appropriate tools and planning techniques to ensure suitable investment structures.
Possibly the most important part of the process is the ongoing management of client expectations – holding their hands when markets appear uncertain and volatile, reminding them of their time horizon and how the portfolio structure ensures risk is managed in an appropriate manner.”
John Hall
Authorised financial adviser
Trenthills Financial Services
NSW
“You ask them whether they have been parachuting before. And if they have then you don’t have to talk to them about risk. Planners are not really supposed to ask people’s risk profile, rather first determine and put the cart before the horse.
Planners need to determine what a client’s objectives are and let them know the consequences in relation to risk.
If their objective is to retire at $30,000 a year, then they have to know that they need to take risk, and you must make sure they can understand the consequences of it.
Basically as a planner you have a responsibility to education clients about risk and about the costs that impact on return. Then you have to make them understand that they have to retire at an old age, or with a large sum of money.
Volatility isn’t a risk. People need to have an element of risk to meet their objectives.
I think as an industry, we need to constantly re-asses the models, the twentieth century models that we are using in an environment that is dynamic and changing.”
Kevin Bailey
Managing director
The Money Managers
Melbourne
“I don’t have a formal process that I go through but I do talk to people. Firstly I bring up the subject of risk and ask them if they know what risk means and where it sits in their lifestyle.
As I get to know a client a bit better, I try to classify them into one of the personality types to try and ask the right questions to them, and encourage them to tell me what they think is their risk profile. Before the asset allocation portfolio, I talk about risk and generally what sort of personality they are.
I have tried variations questionnaires, and I think they are very good, but the difference between questionnaires and what I do is that I personally like to get to know the clients. I find the more time I put in with them the less problems I have down the track.”
Leonie Henry
Director
Henry & Co
Queensland
“When making an assessment of a client’s risk profile, it is important that the financial planner spends time during the fact finding interview collecting data that will assist them assess what level of risk and return the client is willing to accept and what level will be needed to satisfy the clients’ goals and investment objectives.
This will involve the financial planner discussing and explaining the concept of investment markets and the returns and volatility that is associated with such markets.
The client’s concerns will also need to be discussed and will affect the risk profile that is determined as most appropriate. Besides information such as the clients’ age, background and current circumstances, the following areas are important in determining the clients’ risk profile: timeframe for the investment; liquidity requirements; previous investment experience; client’s investment perspective; client’s goals and objectives; importance of investment portfolio; ease of management; income requirements; safety and security of the investment portfolio.”
Darryn Fellowes
CFP
AMP Financial Planning
NSW
