Assessing Your Risk Profile

What Steps Should A Financial Planner Take When Assessing Your Risk Profile In Australia?

To further protect investors from being led astray into a financial nightmare, we have put together a guide to help you understand whether your financial planner is profiling your risk correctly.

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Every day, investors are being given poor information and judgement from their financial adviser who may have not had reasonable basis for their decisions. Luckily, the Future of Financial Advice or FOFA reforms have been implemented to enforce a “know your client” rule in order to protect investors from risky investments which do not reflect their profile.

What Is My Financial Risk Profile And Why Is It Important To Get Right?

Your financial risk profile is a vital part of your investment portfolio. It measures the level of risk that you are comfortable with when it comes to each and every one of your financial investments. Each profile is different and should differ between every individual client based on their personal requirements.

Your planner is bound by the law to only provide you with financial advice if it is reasonable for you based on your financial risk profile. For this reason, your financial risk profile must be completely accurate in order to protect yourself from financial hardships. If your planner misrepresents your risk, you may be eligible for a financial negligence claim.

What Steps Should Your Financial Planner Take To Assess Your Risk Profile?

In the opening stages of your financial planning process, your adviser should begin to undertake accurate risk profiling according to your investment capabilities. While there is no set way of doing so, methods vary depending on your specific planner although should consist of some basic factors, including:

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A Detailed Questionnaire To Assess Your Level Of Risk

One of the most common and easiest ways of assessing your risk profile is through a Risk Profile Questionnaire. This is where you are asked a series of questions that help determine your reaction to various financial outcomes. You would then be given a score to help assess the amount of risk you are willing to take. Investors are then sorted into categories ranging from conservative to high risk. You are also to assess the category you are place in to see if its right for you.

Life Cycle Approach To Assessing Risk

Your financial adviser may also consider your risk based on what stage of life you are in financially. This approach leads advisers to consider younger investors as risk takers who are interested in accumulating wealth in shorter periods of time and grouping older investors in a more conservative category of financial risk.

Detailed Sensitivity Analysis

This is vital when it comes to assessing your attitude to risk. A Sensitivity Analysis outlines your financial capabilities and how your finances would be affected if your return on investment was not as high as planned or if your investment does not return at all. If a bad return would leave you in financial trouble, you will be categorised as a conservative investor, allowing for steady growth rather than high risk short term investments.

The Importance Of Accurate Information & Changing Your Risk Profile

If you are anything less than honest with your financial adviser, then they will not be liable if your investments don’t match your true intentions. As an investor, you should aim to give the most accurate and relevant information possible, therefore leaving your adviser responsible for making professional decisions which are based on your financial needs.

After settling into the market, you may want to adjust your risk profile as many investors choose to do over time. Depending on your financial status and overall understanding you may want to increase your risk. By keeping up communications with your planner, you can change your risk profile whenever you feel comfortable.

Agreeing On Your Risk Assessment With Your Financial Planner

You must sign and agree to your terms of risk with your financial adviser before they can proceed with your investments. You have to understand what you are signing, so make sure you ask any questions you may have and clarify any aspects of your risk profile which you are unsure of. If you are unhappy with the outcome of your questionnaire or sensitivity analysis, speak to your adviser and ask to change your profile which better reflects your intentions.

What Actions To Take If Your Financial Planner Has Been Negligent

If you believe that your planner has represented you incorrectly in your risk profile or have given you advice that does not reflect your risk assessment, this may be grounds for a negligence claim. For more information about the actions you can take to compensate for financial negligence, contact us today for experienced legal advice leading to a successful compensation claim.