Measure risk tolerance with world class tool

Gerda van der Linde

The Institute of Behavioral Finance, in association with FinaMetrica, has introduced to South Africa the first globally acknowledged system that accurately profiles clients’ risk tolerance.

“The FinaMetrica Risk Profiling System, which provides a financial risk tolerance test and generates personal financial risk profile reports, makes risk tolerance explicit and understandable,” said Gerda van der Linde of the Institute of Behavioral Finance. “By determining a risk profile using this system, clients are generally more confident of the advice given and more committed to the outcomes.”

To date, no standard measurement of a client’s risk profile has been available in South Africa, says Van der Linde. “The Financial Advisory and Intermediary Services Act General Code of Conduct (FAIS Act 2002) requires financial service providers (FSPs) to give advice on financial products which are appropriate to a client’s risk profile and financial needs, but has not defined ‘risk profile’.”

To comply with the FAIS Act, she says FSPs have developed their own risk profile questionnaires and interpret the results themselves. Many of these questionnaires comprise between three and 15 questions that don’t necessarily relate to the risk tolerance of clients.

“There is no output from this process other than the asset allocation recommendation,” says Van der Linde. “In many instances the results of the questionnaire simply point the client towards one of five investment portfolios, ranging from conservative to aggressive.

“Sometimes a brief description of the characteristics of the recommended strategy and the type of individual it is thought to suit is added. However, this is a generalisation of that risk profile and not necessarily true for the individual.”

Developed by Australian company FinaMetrica over four years, with the assistance of the University of New South Wales’ Applied Psychology Unit, the FinaMetrica Risk Profiling System has gained international recognition as world best practice since its launch in Australia in 1998. According to Geoff Davey, cofounder and director of FinaMetrica, leading advisors and financial institutions around the world use the system in seven languages and more than 370 000 FinaMetrica Risk Profiles have been completed.

A South African version of the Risk Profiling System has been developed and is currently available in English and Afrikaans from the Institute of Behavioral Finance. It includes supporting materials, which have been developed to assist the advisor to have a more informed discussion of risk and risk tolerance with the client, gain a deeper understanding of the client and highlight any differences within couples.

“By sharing this information with the client, the adviser-client relationship can be strengthened,” says Van der Linde.

“The Institute of Behavioral Finance aims to add value and enhance the professional status of the investment sector in South Africa and in so doing serve the interests of advisors and clients,” says Van der Linde. “We believe the availability of a world class tool such as FinaMetrica will strengthen one of the fundamental steps in the advice process and thereby enhance the overall professionalism in the industry.

Consumers and financial advisors are invited to determine their own risk profile by visiting www.riskprofiling.com/ibfsa/ and signing up.