Risk Profiling

Question 1

Benefits of risk profiling

Answer 1

• simple process to understand
• helps them understand the level of risk they are individually prepared to take
• can be used to establish different risk profiles for different objectives
• can be used to create appropriate asset allocation model
• establish maximum tolerance for loss

Question 2

Specific factors influencing clients ATR

Answer 2

• life expectancy
• health /family health issues
• adequate emergency fund
• David has realised a large sum from sale of house
• David has more investment experience than June
• June has few assets in her name
• clients thoughts on economic /market conditions
• tolerance for loss
• capacity for loss

Question 3

Risk profiling process

Answer 3

• clients complete a questionnaire
• results fed into a computer programme
• this generates a risk score
• score used to produce a recommended asset allocation
• results discussed with client to ensure it meets their representation of risk
• once all agreed, the assets are allocated

Question 4

Drawbacks of risk profiling

Answer 4

• doesn’t take account of taxation issues, charges or that different software systems can produce different risk profiles
• based on historic data
• only accurate for one moment in time