Weapons of mass wealth destruction
In terms of the regulations in financial advisory (the FAIS act), every advisor is obliged to determine the ‘risk profile’ of their client. Many advisors and brokerages have interpreted this to mean a canned questionnaire, now decades old, originally established by certain insurance providers. If you’ve ever taken out an investment policy with a broker you’re probably familiar with the form. There is increasing concern that this questionnaire is used as a blunt instrument, mostly for ass covering if everything goes pear-shaped. Even at the Financial Services Board it is recognised that thought and care needs to enter the equation too.
The reason these profiles are required is that rogue brokers in the past sold high risk investments to pensioners who lost all their money. Is the current format going to fix the problem? I don’t think so, it I time for a rethink.
I have made no secret of the fact that I think these questionnaires are dated, and in the hands of an inexperienced broker can be a weapon of mass wealth destruction. What have questions on short-term insurance excess got to do with investment risk appetite today? If a client has a decent emergency fund, but actually has a conservative investment profile, the fact that he or she takes a higher excess because he or she can afford it, is irrelevant. Asking questions like “Would you rather invest R20k, and potentially grow it to R50k or maybe lose it all” or (in the other box) “Grow it to R25k, but not lose anything” – is probably going to skew the results to gamblers and others.
Interestingly robo-advisors use a variation of the risk profile questionnaire to place their clients into funds, but in the US they are coming to realise that this does not constitute ‘advice’.