The recent introduction of Twenty20 cricket is a wonderful example of the power of change. Who would have thought seven or eight years ago that there would be cricket matches played with dancers on the boundary rope, fireworks going off at exciting moments and blaring music being played at every possible opportunity? Never mind the fact that a whole cricket match could be played in just three hours!

When it comes to financial planning, there is one practise that we really need to change to improve the experience and outcome of all players in the industry. This practise is commonly known as 'Risk Profiling', which is seen as a method to help financial planners understand their clients better, and for clients to understand themselves better. The problem is that many people view Risk Profiling as a sacred cow, and to challenge this is probably more radical than suggesting that a cricket match be played in three hours!

A sacred cow

The extent to which Risk Profiling is a sacred cow is demonstrated by the FAIS Act’s General Code of Conduct, which guides the provision of financial advice. It states that 'A provider must, prior to providing a client with advice, identify the financial product or products that will be appropriate to the client’s risk profile and financial needs'. In effect this is telling us that to comply with the rules of the game, a financial planner needs to do a Risk Profile of their client.

The FAIS Ombud has also gone on public record as saying, "When considering a complaint, the Ombud has to conduct an investigation. He will look at all avenues of non-compliance or wilful negligent conduct on the part of the FSP or representative… this may include failure to give appropriate advice which may be manifested by the failure to do a risk profile."

What is risk profiling?

Given what the rules and the umpire have to say, it would seem that the process of Risk Profiling is a very sensible thing to do in the game of financial planning. Why then the call to commit sacrilege?

Before answering this question, let’s look briefly at the process of risk profiling. In essence, it requires a client to complete a questionnaire, which seeks to understand their attitude towards, and perceptions about risk.

Points are allocated for each answer and the total points scored will indicate whether the client’s risk profile is on the one end of the scale, 'Conservative', 'Aggressive' on the other end' and 'Balanced' or a permutation thereof in between. Usually a risk profile questionnaire will have up to five or six different profiles into which clients can be categorised. Once a client’s risk profile has been determined, it is possible to match an investment to the client’s risk profile.

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