Effective client engagement

Effective risk assessment is essential in order to provide the appropriate investment advice to clients. It also gives intermediaries a powerful tool for better client engagement, says Danelle van Heerde, Head of Advice Processes and Tools at Sanlam.

There is a trend in investment planning towards investment recommendations based purely on the clients’ investment objectives. While it is essential to provide advice on the basis of understanding the client’s investment objectives, such as the purpose of the investment, the planned investment term, access required to the investment and income required from the investment, these should not be the only considerations.

A one tracked mind

Van Heerde also points out that there are instances where a client’s risk tolerance is the only factor used in determining an investment strategy, without taking any consideration of the client’s investment objectives. This however, can lead to highly inappropriate investment advice.

Van Heerde says that the Financial Advisory and Intermediary Services (FAIS) and Treating Customers Fairly (TCF) regulations, amongst other things, have presented the industry with a strong imperative to include the consideration of a client’s personal risk profile in addition to evaluating the investment objectives. According to van Heerde, this is one of the factors which have prompted a renewed worldwide focus on scientific behavioural risk assessment.

“The industry should welcome this as there is strong evidence of the value of effective risk profiling. You need to know how your client will react to market movements, bottom line.
“Intermediaries are providing positive feedback where a client’s investment strategy is determined through an assessment of the client’s risk tolerance, as well as a thorough analysis of the client’s investment objectives,” she says.

Correct methodology

It is crucial that a client’s risk tolerance is determined using scientifically developed and psychometrically tested questionnaires that accurately measure the tolerance for financial risk. Van Heerde argues that the risk tolerance assessment should be independent of the objectives for a specific investment and should, therefore, not contain questions related to an investment.

“Even before the regulations were introduced to South Africa, the analysis of international experiences enabled our industry to effectively consider risk profiling from a TCF perspective. Many companies, including Sanlam, refined their processes following the implementation of TCF in the UK and the UK Financial Services Authority’s (FSA) audit of investment processes and risk tolerance practices.”

Van Heerde says that Oxford Risk developed a questionnaire specifically aimed at Sanlam’s South African client base with its complex demographics and this has delivered the desired results.

“With the help of assessment questionnaires, intermediaries can explicitly position risk tolerance to clients when they determine the most appropriate investment strategy to meet their investment objectives.”

Understand client risk tolerance

Van Heerde says there is more than enough evidence that understanding a client’s risk tolerance will help an intermediary to better manage his engagement with the client.
“Consider, for example, a client with a high tolerance for financial risk who will be less stressed in market movement, against the challenge of engaging a client with a lower risk tolerance in a volatile market movement environment. The latter will need to be reassured and this is also where the TCF regulations enter the scene. Ultimately, it is an opportunity for the intermediary to actively engage his client, but it is also imperative.”

The bottom line is that reliable risk profiling aids in ensuring a better understanding of how a client feels about financial risk, which in turn will help intermediaries to tailor their conversations with their clients.

“However, we also want to know whether the client understands that there is a trade-off between risk and return. This is where a good questionnaire can highlight the expectations of the client, enabling the intermediary to engage in an educational task to manage unrealistic expectations.”