Financial Planning

What Steps a Financial Planner Takes to Assess Your Risk Profile

To assist you in your financial planning needs, you may wish to engage the help of a financial planner to assess your risk profile. A financial planner is a licensed professional who is able to provide personalised financial advice, suited to your financial needs and circumstances.

There is now a ‘know your client’ rule so that financial planners better understand their clients and give appropriate financial advice. As part of this, financial planners must develop a risk profile for clients, which will form the basis of any advice given. Read on to find out more about risk profiling, and the steps a financial planner should take to assess your risk profile.

What is a risk profile?

A financial risk profile identifies and measures an investor’s attitude to risk. It essentially assesses risk tolerance and aims to determine the level of risk the investor is comfortable with. Risk tolerance is specific to the investor and will vary significantly among individuals.

The risk profile forms the basis of the financial planner’s recommended investment strategies. Failure to undertake risk profiling will constitute financial planning negligence as the financial planner has not collected all the relevant information before making a recommendation, and therefore there is no reasonable basis for any advice given.

How does a financial planner assess your risk profile?

Risk profiling should be undertaken during the initial stages of the financial planning process and must be done before any advice is given. There is no set method of risk profiling and the methods used may vary among different financial planners. Some common risk profiling methods include:

Risk Profile Questionnaire

The most commonly used risk profiling tool is the Risk Profile Questionnaire. This involves asking the investor a series of questions, to determine their reaction to different financial outcomes. The investor’s responses are then scored and classified into a category of investment style.

Risk Tolerance Line

Using usually a five or ten point scale, the investor is asked to indicate their preferred place on the scale. The scale ranges from low-risk tolerance to a high-risk tolerance.

Life-Cycle Approach

This method takes into account what life stage the investor is in. Generally, it assumes that a younger investor is more concerned with wealth accumulation and would have a more aggressive risk profile and that older investors are more concerned with income and would therefore have a less aggressive risk profile.

Sensitivity Analysis

This method tests how different outcomes would affect the investor’s financial capacity, such as how the investor’s financial capacity would be affected if the expected return was not realised.

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How do I know whether my risk profile is accurate?

Once the financial planner has developed a risk profile, they must share this with their client who must then sign off having had the opportunity to read and correct anything inaccurate or disagreed with and to signify they are ready to proceed. This includes acknowledging that the risk profile determined by the financial planner is appropriate for their circumstances. If the client feels that their risk profile is inaccurate, they are able to discuss the categorisation and nominate another risk profile which better reflects their circumstances.

Will my risk profile ever change?

It is normal for risk profiles to change over time. This can be attributed to changes in the investor’s attitude to risk or their changing personal circumstances, such as starting a family or buying a house. As such, a financial planner should review a client’s risk profile regularly. If you feel that your circumstances and/ or risk profile has changed, you should inform your financial planner as soon as possible.

What should I do if my financial planner has been negligent?

Before you act upon any financial advice, you should ensure that it has been given in light of your financial and personal circumstances and that it will help you to achieve your financial objectives and goals. If you feel that your financial planner has not properly assessed your risk profile, or that any advice given was not in line with your risk profile, this may constitute negligent financial advice and you may be eligible to make a financial negligence claim against them.
For more information on making a financial negligence claim, get in touch with Schreuders today.

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