The Institute of Behavioral Finance has introduced to South Africa the FinaMetrica Risk Profiling System, which provides a financial risk tolerance test and generates personal financial risk profile reports, makes risk tolerance explicit and understandable. Gerda van der Linde of the Institute of Behavioral Finance, comments, “By determining a risk profile using this system, clients are generally more confident of the advice given and more committed to the outcomes.”
To date, no standard measurement of a client’s risk profile has been available in South Africa, says Gerda. “The FAIS Act 2002 requires financial service providers to give advice on financial products which are appropriate to a client’s risk profile and financial needs, but has not defined ‘risk profile’. FSPs have developed their own risk profile questionnaires and interpret the results themselves, but many of these questionnaires don’t necessarily relate to the risk tolerance of clients. There is no output from this process other than the asset allocation recommendation. In many instances, the results of the questionnaire simply point the client towards one of five investment portfolios, ranging from conservative to aggressive. Sometimes a brief description of the characteristics of the recommended strategy and the type of individual it is thought to suit is added. However, this is a generalisation of that risk profile and not necessarily true for the individual.”
Developed by Australian company FinaMetrica over four years, with the assistance of the University of New South Wales’ Applied Psychology Unit, the FinaMetrica Risk Profiling System has gained international recognition as world best practice since its launch in Australia in 1998. A South African version of the Risk Profiling System has been developed and is currently available in English and Afrikaans from the Institute of Behavioral Finance. It includes supporting materials, which have been developed to assist the advisor to have a more informed discussion of risk and risk tolerance with the client, gain a deeper understanding of the client and highlight any differences within couples.
Consumers and financial advisors are invited to determine their own risk profile by visiting www.riskprofiling.com/ibfsa/ and signing up.