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FINANCIAL PLANNING FIB #3
If you seek advice from
a financial planner, you can be sure that
at some point you will be asked to complete
a risk questionnaire. For those who have
not yet seen one, it's a series of about
a dozen or so questions that try to determine
how comfortable you are with financial risk.
These questionnaires are popular for a number
of reasons but the most important one is
to satisfy the legal requirement that advisers
take into account their client's risk profile
when giving investment advice.
The problem is that most of these questionnaires
are flawed. They contain all sorts of questions
that are not related to risk, they are too
short to give an accurate risk reading and
they're used to justify inappropriate investment
advice.
Risk questionnaires are supposed to measure
your risk tolerance, not be used as an asset
allocation tool or to classify you as a
conservative or aggressive investor. Yet
this happens all the time. For example,
it is not uncommon to meet couples aged
in their thirties who have all their super
invested in capital stable funds because
they've been classified as conservative
investors. Given that this super money can't
be accessed for another two decades, why
are they invested in such low return products?
At the other end of the scale, we've met
eighty-year-old pensioners who rate as aggressive
risk seekers on the risk questionnaire scorecard.
But in such cases, the client's high risk
tolerance should not override their
risk capacity and there is no way
they should be putting all their life savings
into geared investments or speculative shares.
It is important to make sure that your financial
planner is giving you advice, not taking
the easy option of letting a poorly-designed
risk questionnaire do the job for them.
Having a low risk tolerance doesn't necessarily
mean that you're a conservative investor.
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