Advisers nervous about risk profiling

Regulation and recent court cases have left advisers unsure about the best way to risk profile their clients, and a lack of products is making the process more difficult.

Wednesday, October 3rd 2012, 6:00AM

by Niko Kloeten

Institute of Financial Advisers president Nigel Tate said risk profiling is a "hot topic" in the adviser community at the moment, and "the biggest issue appears to be the definition of risk profiling: what constitutes a risk profile?"

He said risk profiling is a "multi-faceted beast" and as well as measuring people's attitudes to risk, advisers also need to try and work out clients' risk capacity, meaning how much risk they can actually afford to take based on their financial situation and savings goals.

"Where advisers are struggling is how do they measure risk capacity?" he said.

A problem, according to Tate, is that while there are a number of different psychometric testing tools available to assess risk tolerance, there aren't many products that help assess risk capacity.

"We need tools that can look at the worst-case scenario and say to you, do you have the capacity to accept that risk? You can then either reduce your expectations for retirement or boost your contributions for retirement."

Carey Church, who was sued by former client Neil Armitage over investments in several finance companies, also said there was a lack of tools available for helping advisers work out the risk capacity of clients.

She said one change she had made to her own risk profiling process was she no longer sat with clients while they did their tests (she was never with Armitage when he did his).

The reason, Church said, is that international research shows advisers can influence how clients answer these questionnaires.

“In hindsight if I look back I think that’s pretty valid,” she said. “I’m a very aggressive investor personally and in my discussions with clients I possibly helped them be more aggressive.”

Even the gender of the adviser can play a role. Recent research found that men report lower tolerance for risk when they answer questions from a man, while women report higher risk tolerance when speaking to a male adviser. And when clients see the interviewer as attractive, their risk tolerance tends to be higher.

"All risk profiles are a tool only and are no substitute for extended discussion with your clients," Church said.

Niko Kloeten can be contacted at niko@goodreturns.co.nz

« Perpetual adviser business sale nears

Fund managers call for level playing field »

Special Offers