The outcome of these discussions should be documented in the factfind and meeting notes, and subsequently combined with the risk questionnaire results to form the basis of investment advice. If there is a difference between the score produced by a questionnaire and any discussions, these can be discussed with the client and recorded appropriately.
You would not undertake a road trip around Europe after looking at the map just once before you set off on the journey, and the same can be said of financial planning. Advisers and their clients need to consider how long the results of a risk-profiling questionnaire remain valid and when a new questionnaire should be completed.
There is no right or wrong answer to these questions. Each firm needs to take a view.
A typical extract from a firm’s procedures on risk profiling might read: “Every client who receives a regular review should be asked to revisit the questionnaire as and when changes in their personal and/or financial circumstances dictate, but as a minimum every two years.”
It is important to have the systems in place to monitor all clients with such a service agreement to highlight those who have not completed a questionnaire in the past two years and ensure a fresh one is completed at the next review.
Different financial planning objectives with different investment time horizons would be expected to give rise to differing views on the acceptable level of risk, but how often do advisers ask clients to complete more than one risk questionnaire?
For example, a client who wants to save for his child’s school or university fees over the next five years may not be prepared to accept the same level of risk with this element of his financial planning as he would for funding his own retirement, which may be 30 or 40 years in the future. Which objective does he have in mind when he completes the initial risk-profiling questionnaire?
Advisers should be having a conversation with their clients about the relevance of their headline risk score to the specific financial planning objective and, if relevant, differentiating the subsequent investment recommendations accordingly.
A user-friendly and robust risk-profiling tool will help advisers take a snapshot of client’s experience and understanding of investment risk, the degree to which they are prepared to expose their capital to risk and how they would expect to be rewarded in return for taking that risk.
