Over the last few years all sorts of buzz words have entered ‘Financial Speak’;… asset allocation, wraps, platforms, cash flow modelling, third way annuities, beta, alpha (to name just a few), but it’s Risk Profiling that I wish to address today, and how it should and shouldn’t be done.
So, I will start from the basic principle that it is right and proper to initially and then regularly assess a client’s attitude to risk… it’s the differing methods that are being used that is the issue.
Not that long ago, I met a archetypal ‘little old lady’ for the first time, for those of you with a disposition of being “PC”, it could of course have been a little old man, but it wasn’t. Oh, and I have injected a little humour in the hope that you will stay awake!
Now, Ethel, as I will call her (not her real name, but you understand what I mean) had her monies invested with an IFA (Independent Financial Adviser)… horrible title… and had held her monies with that same firm for a number of years. However, she hadn’t seen or heard from them for some time, but still, Ethel trusted them. One morning, whilst in her garden talking to her roses, the ‘Postie’ called with her Damart Winter Wear catalogue, well it was July after all, and a very large letter from her IFA… excitedly she cut her conversation short with Etoile de Hollande, her favourite climber, and went inside to read it over a cup of Earl Grey.
The letter explained that her IFA thought it was time to review the risk of the investments that he was managing for her and had enclosed a Risk Profiling Questionnaire, which she should complete and return. It went on to say that on receipt the IFA would review the answers, analyse the portfolio, and send his recommendations, if any changes were necessary.
Eventually after several attempts and much head scratching, Ethel completed the form, and sent it back to her trusted IFA.
A few days passed by, Ethel managed to ward off a minor attack of greenfly, and then the much anticipated reply from her IFA arrived.
To Ethel’s trusting, but untrained eye, the letter seemed to be in order, if perhaps a little impersonal in that it only seemed to mention Ethel’s money, ‘not her’. The letter thanked her for completing the form, commented that the answers had been analysed, and that as this showed she was a ‘Moderately Aggressive Investor’, and up on signing the enclosed documentation, her portfolio would be adjusted accordingly with the associated fee of £wxyz being paid to her IFA from within her portfolio… all very clinical.
Just in case you are wondering, this is NOT how things should be done!
Whilst yes, a risk profiling questionnaire is a starting point, it absolutely should not be used in isolation.
Let’s think about Ethel...
- Did Ethel really understand the questions within the questionnaire?
- Where was the personal interaction, in order to confirm the answers?
- What are Ethel’s current concerns about her future?
- What is the realistic time scale for Ethel’s investment portfolio?
- Does Ethel have concerns about Care Planning?
- Does Ethel have any Inheritance Tax concerns?
- How much risk does Ethel actually need to take to meet her financial planning?
- If Ethel has sufficient assets for her needs, does she wish to make gifts to her Family?
- Did Ethel understand the associated potential volatility of her revised portfolio?
These, and others, are the types of questions that a Financial PLANNER would ask Ethel; taking care to listen to what she says, but understanding what she means, as a PLANNER knows that it is actually Ethel who is the client and not Ethel’s investment portfolio.
If you would like a grown up conversation about you and your risk, feel free to contact us for a no-obligation, complimentary initial meeting.