Profiling a risky venture for advisers
A leading academic and dealer group chief has cast serious doubt on the role of risk profiling as a key foundation to financial planning.
Macquarie graduate schoolof management professor of finance Tom Valentine has criticised current processes that measure both clients’ risk profiles and the risk of assets, arguing their value is doubtful and that more time should be devoted to clients’ actual needs instead.
According to Valentine, who is also about to release a financial planning textbook, behavioural finance theory shows people react to risk in irrational and inconsistent ways, and often claim to have risk profiles contradicted by their past actions.
He thus questioned whether risk profiles were meaningful, adding common profiling instruments were too long or vague.
Valentine’s conclusions also reflect his experience as partner of The SalisburyGroup.
“I got feedback from our advisers that [profiling] results didn’t correspond with their own view of the client or the client’s view of themselves,” he said.
He argued that the classification of assets, such as shares being deemed more risky, was also flawed as it failed to consider investors’ time horizons.
“Investors in superannuation have a long time horizon,” he said.
“As an adviser, if you were going to put that client into a conservative portfolio because their risk profile suggests they are nervous, you are not doing the right thing by the client.
“They should be in higher yield investments such as shares and listed property, which will leave them in a better position over the longer term.”
While Valentine said some advisers were cynical about the outputs of risk profiling instruments, he believes fear of litigation from omitting an exercise expected by regulatory bodies pressures them to continue the practice.
“But what’s really going to get them into trouble is not recommending what’s in their client’s best interests,” he said.
Recommended for you
The FSCP has announced its latest verdict, suspending an adviser’s registration for failing to comply with his obligations when providing advice to three clients.
Having sold Madison to Infocus earlier this year, Clime has now set up a new financial advice licensee with eight advisers.
With licensees such as Insignia looking to AI for advice efficiencies, they are being urged to write clear AI policies as soon as possible to prevent a “Wild West” of providers being used by their practices.
Iress has revealed the number of clients per adviser that top advice firms serve, as well as how many client meetings they conduct each week.