The risk profiling is done by a simple method – the risk questionnaire. Sadly when the unsophisticated client is filling it up, he does not always understand the wordings. Even if he is sitting with an IFA there seems to be a hurry to get over it so that they can go to the more important work – of filling the investment form. So an IFA who decides that a client should be in 80% equity and 20% debt makes sure that the questionnaire is filled up in that manner, if at all. So the purpose of filling in a questionnaire is to ‘follow procedure’ because the bank / website / national level distributor has that form. Most of the people filling in that form do not understand the need for such a form.

I am convinced that Disclosure about risk should describe the significant risks that the client will bear in relation to acquiring any recommended: (i) financial product specifically; and (ii) class of products generally.

Sadly most IFAs are very scared to spend less time on risk than they should. Will this not be a better approach (even from a sales point of view)

” You are investing Rs. 25,000 per month in an Equity dominated balanced fund. This means in one year you would have invested Rs. 300,000 and over 10 years Rs. 30,00,000. Sure in one year you could see it up by 10%p.a. or you could have lost Rs. 60,000 by the end of the year. Similarly in the second year you could see a further jump OR A BIG FALL of Rs. 40,000 – and taking the total value of the fund to a figure much less than what you have invested. Sure, if you stick around for 5-7-12 years the chances of getting an inflation adjusted REAL return of 1-2 percent.”

this is a good sales pitch too – what say?

Another problem with risk profiling is that clients risk profile seems higher when the markets are going up (OMG risk is so counterintuitive!!) and low when the markets are falling (or fallen). At 21000 the client is more worried about portfolio erosion (that has already happened) than the erosion that could have happened at 32000!! So the mind is fearful when it should be greedy and the reverse. See filling up a Risk questionnaire for a client at various stages of the market and you will realize this.

Ask clients how much returns are you expecting from equities – one CEO said 40% – I asked him what ROE is he getting in his company (he was an employee of course, and had NO IDEA). Went to the office and called me to say  ‘Subra you should write a book on ‘how to teach finance to FINANCE PROFESSIONALs!!  PEOPLE have no clue about what risk they are taking in their current portfolio, their expectations, their needs,..it is the job of the IFA to explain this to the client/ reader / student / banker….