Understand your basic risk profile

Understand Your Risk Profile

Investment Optimisation

Explaining your Risk Profile

A Risk Profile is a way to measure your aversion to risk and this is summarised into investor types, such as Secure, Conservative, Balanced, Growth & High Growth. A tool that Financial Planners and product providers use is called a Risk Profiling Tool which is essentially a series of questions that determine your aversion to risk. Fintor likes to go a little further in assessing a client’s attitude to risk by asking additional questions, providing real-life examples and assessing their previous investment choice. This course is designed to help you understand the key difference between the industry’s and Fintor’s processes provide you with the knowledge required to truly tailor your risk profile to your individual beliefs.

What is a Risk Profile

A Risk Profile is primarily used to select and determine the appropriate asset allocation for an investor’s portfolio. Essentially, an investor’s risk profile helps identify the level of risk an investor is prepared to take when investing in a portfolio of assets. The level of risk an investing is willing to take refers to their aversion to market cycles and the potential for volatility or investment loss.

For example, an investor may rather maintain the value of their portfolio. If they’re willing to forgo potential capital appreciation, they’re likely to be risk-averse. On the other hand, perhaps an investor seeks high returns. If they can tolerate market volatility, then they may be willing to take on more risk.

How is your Risk Profile calculated?

Putting your money in investments is scary, particularly if you don’t know what you’re doing or know the actual risk you are taking. Taking on too much risk can lead to sleepless nights, stressed-out days, and potentially serious losses to your wealth. Taking on too little risk is likely to deliver sub-optimal investment returns and make it harder to achieve your objectives.

Risk will always be apparent in any investment you choose, even a bank account. Managing risk is a core element in every successful investing strategy, and the starting point of risk management is understanding your risk profile. So how is this calculated?

Financial Services Licensee’ & product providers mainly mandate that their representatives (Financial Planners) must ask a series of pre-set questions. Each Licensee has their own questionnaire consisting of about 10-20 questions. An example of a quality risk profile tool is Lonsec – iRate Risk Profiling tool. Lonsec is one of Fintor’s independent investment research providers.

Lonsec -iRate Risk Profiler example

These are the questions one of Australia’s leading Investment Risk Researching teams asks to profile a client’s aversion to risk.

The answers you can select from:

  • Long Term (more than 10 years)
  • Medium-Long Term (5-10 years)
  • Medium-Term (2-5 years) Short Term
  • (1-2 years) Parking (less than 1 year)

The answers you can select from:

  • Yes
  • No

The answers you can select from:

  • I am comfortable with this trade-off to beat inflation
  • I am conscious of the risks inflation presents but would prefer a middle ground
  • Inflation may erode my savings but I have no tolerance for loss

The answers you can select from:

  • Low risk/return (maximum return 6% pa, minimum return 0% p.a.)
  • Moderate risk/return (maximum return 8% pa, minimum return -5% p.a.)
  • Above average risk/return (maximum return 12% pa, minimum return -10% p.a.)
  • High risk/return (maximum return 20% pa, minimum return -25% p.a.)

The answers you can select from:

  • Move the entire invest investment into cash
  • Move some of the investment into cash
  • Do nothing
  • Buy more of the investment

The answers you can select from:

  • Shares, Technology Funds, Smaller Companies Funds
  • Managed Funds
  • Investment Property
  • Own Home
  • Cash Management Account

The answers you can select from:

  • A portfolio of potentially high-returning shares whose value could rise or fall dramatically
  • A blue-chip portfolio that pays regular dividends
  • A mixture of the above two options
  • I am not interested in shares

Fintor’s Risk Profiling Tool.

Fintor currently uses our Licensee’s risk profiling tool to obtain a basic understanding of a client’s aversion to risk. However, Fintor’s team of advisers go into a lot more detail when calculating a client’s risk profile. This course emulates that process!

Click the calculator to complete Fintor’s basic risk profiling tool

Basic Risk Profiles are limited

A basic risk profiling tool is a great way to profile someone’s aversion to risk on mass. This means it is a great tool for Licensees and Corporations that are trying to create a “compliance” standard for how their Financial Planner/Advisers profile their client’s aversion to risk and thus formulate recommendations to invest the client’s money.

This method has some serious limitations and in order to tailor your risk profile to you personally, you firstly need to understand the limitations of this profiling method and know what the results of your profile actually mean.

Skewed Result

It is the preference of most Licensees in Australia to skew clients towards a more Conservative risk profile as this profile limits the risk of complaints being made. Majority of complaints are driven by investment returns, with clients complaining that their Financial Planner/Adviser recommended an investment that didn’t suit their attitude to risk. Funnily enough, the complaints are very minimal in times of good economic growth. Whilst it is very important that your investment suits your aversion to risk, it is equally important to uncover your actual aversion to certain asset types. By investigating which assets you are more comfortable with and which you are not, you are further able to tailor your risk profile to suit you. Without this process, you are likely to be considered a Balanced Investor in your 20s & 30s, in a period where you should focus on building wealth. Depending on your preference, it is the common belief of most Financial Planners/Advisers that someone in this age group should be Growth or High-Growth, but due to compliance and risk profiling, this becomes a significant burden and a compliance issue. A true understanding of the limitations of a basic risk profiling tool will help you shift your thinking.

Tailor Your Risk Profile

Tailor & Understand Your Risk Profile

Learn how to calculate your financial need for different insurance covers, assess the quality of the insurance policy, and understand the features and definitions important for your protection. Tax minimisation and estate planning strategies are also included!

Only $19.95