Killing the sacred cow
At a Financial Planner Forum hosted by the Association of Collective Investments (ACI) earlier this month, Robert Macdonald of Xchange Solutions shared some interesting views on the financial planning process. FAnews Online enjoyed the presentation in whi
Before we share some of Macdonald's views on the sacred cow of the financial planning world we consider some of the models employed by financial advisers as they go about the business of selling and advising financial products.Quick-sell cowboy versus relationship builder
Many of today's tied agents adopt what can best be described as the distribution model. This model is sales driven with the stated objective of selling as much investment product as possible. Client's needs and wants are identified to facilitate the selling process only.
A more professional approach is to adopt the advice model. This model demands that the financial planner focuses on the mutual achievement of a long term financial goal. It results in a relationship between the advice giver and the client which should stand the test of time.
Moving the focus from selling as much product as possible to building long term relationships is essential in gaining the clients trust.
Regulators love risk profiling
MacDonald believes that 'risk profiling' is the sacred cow of financial planning. He substantiates this view with excerpts from legislation and comments from FAIS Ombud, Charles Pillai.
Section 8(1) c of the FAIS General Code of Conduct says that "A provider must, prior to providing a client with advice identify the financial product or products that will be appropriate to the clients risk profile and financial needs." But the legislation says nothing about what the service provider should do if a risk profile is unable to accommodate the financial needs of the individual.
Pillai similarly ignores this possibility. In considering complaints against financial advisers "He will look at all avenues of no-compliance or wilful negligent conduct on the part of the FSP or representative... This may include failure to give appropriate advice which may be manifested by the failure to do a risk profile." We bet many financial planners wished that a diligently performed risk profile precluded liability for other shortcomings.
Identifying risk profile as the sacred cow of financial planning has unwanted consequences. Risk profiling becomes the departure point for the financial plan and creates a mindset which might skew the financial advice that follows. The reason is that starting the planning process with a set of possible solutions in mind eliminates a whole range of more appropriate alternatives.
Time to kill this sacred cow
A quick look at a range of risk profiling questionnaires demonstrates some of the dangers associated in applying the concept in practice. Forms can be too simplistic, too general and potentially very dangerous! Problems with risk profiling questionnaires make it difficult to rely on the resulting profile as a guide to financial decisions, and one has to question the credibility of a system which channels millions of investors into one of four or five categories.
While Macdonald admits that risk profiling "helps a financial planner to educate and understand their client better, thereby enabling them to manage the client more effectively and help the client meet their needs," he feels the practice poses a risk to financial planners. The bottom line is that risk profiling does not guarantee good advice. If anything it forces the financial planner to choose an investment solution based on investor perceptions at a particular point in time rather than the stated financial objectives.
Financial planners need to accept the complex behaviours of individual investors and focus on investment risk rather than risk profiling. It might be time to kill this sacred cow!
Editor's thoughts:
Plenty has been written about the use of risk profiling in financial planning. But categorising a client as a conservative, moderate or aggressive investor at the outset might taint the advice the financial adviser eventually gives. Do financial advisers focus on risk profiling too early in the advice process? Send your comments to [email protected]
