Determining A Client’s Risk Profile

Question 1

What are the key methods to determine a client’s risk profile?

Answer 1

1. Fact-find and risk questionnaire.
2. Review of existing investments.
3. Risk-profiling questionnaire.
4. Capacity for risk.
5. Client education and discussion.
6. Impact on asset allocation.

Question 2

For each of the key methods for determining a client’s risk profile - explain what they mean?

1. Fact-find and risk questionnaire.

Answer 2

1. Initial fact-find includes gathering financial details and completing a risk questionnaire.
2. Despite limitations, questionnaires are a valuable tool when combined with wider discussions.

Question 3

For each of the key methods for determining a client’s risk profile - explain what they mean?

2. Review of existing investments.

Answer 3

1. Provides insight into the client’s understanding and comfort with investment volatility.
2. Although, it cannot be solely relied upon— clients may not fully understand investment risks and their implications

Question 4

For each of the key methods for determining a client’s risk profile - explain what they mean?

3. Risk-Profiling Questionnaires

Answer 4

1. Based on psychometric principles.
2. Assess willingness of clients to take risk, different types of investment preferences, and behavioral traits (e.g., regret avoidance).
3. FCA advises against over-reliance on these tools but acknowledges their usefulness.

Question 5

For each of the key methods for determining a client’s risk profile - explain what they mean?

4. Capacity for risk.

Answer 5

1. Measures a client’s financial ability to take risk, separate from their willingness. This is identified from the attitude to risk questionnaire.
2. Takes into account life circumstances that may affect their risk-taking ability now or in the future.
3. If capital loss would materially impact the client’s lifestyle, it must be factored into risk assessment.

Question 6

For each of the key methods for determining a client’s risk profile - explain what they mean?

5. Client education and discussion.

Answer 6

1. Advisers must ensure clients understand different types of investment risk (e.g., interest rate, inflation, shortfall risk).
2. Helps align investment strategy with the client’s true risk tolerance and financial situation.

Question 7

For each of the key methods for determining a client’s risk profile - explain what they mean?

6. Asset allocation.

Answer 7

1. Risk profile determines asset allocation for each financial objective.
2. Asset allocation plays a critical role in overall investment performance.