Investment advice starts with establishing the risk profile of a client. This profile will determine the details of the investment portfolio and provides the foundation for the specific investment recommendations. There are various methodologies to establish a risk profile. The traditional questionnaire still remains a popular method in the world of financial advice to assess the so-called risk appetite of a client. “But the questionnaire does not or barely take into account the personal situation of the client. While this should really be the starting point,” according to Ronald Janssen, managing director of Ortec Finance (Private Client Solutions).


MiFID II states that financial institutions should give more substance to the ‘know your customer’ policy. This is an important reason to see if the risk profile should be determined based on the goal and client level.

Insight

The process Janssen advocates begins with defining the client’s goal(s). “Subsequently you ask yourself with which product you want to realize said goal(s). Then you provide insight into the risks and the various solutions. And you determine how much risk you are willing to take in order to realize the goal(s). The point is that you can only decide what risk you want to take if you have quantified the relevant risks and understand them. This is the first step. The second step is that, when the client uses multiple products to reach the goal, or has one product for multiple goals, you should view this in a more holistic manner.”

“In short, you determine the risk you are willing to take after you have insight into the feasibility of the goal(s) based on client-specific information, instead of doing it up front based on general product information.”

Concrete

During step 1 we first calculate for a specific product what the feasibility of the goal(s) is/are given a certain deposit/inlay. We must also ask – and this is important in meeting the current legislation and regulation (MiFID II): suppose if you do not reach the goal(s), how bad is this? What are the consequences in the long term? What if the product performs bad this and the following year? Sometimes people have a goal in mind (‘saving for my retirement’), but have not made it concrete (‘I need to save € 200.000,- for a solid pension supplement’). A concrete goal helps you avoid having to make additional deposits, adjust your goal along the way, or having to extend your horizon.”

Commitment

“In short, you determine the risk you are willing to take after you have insight into the feasibility of the goal(s) based on client-specific information, instead of doing it up front based on general product information. This is an important move away from selling a product and towards a client-centred approach. It will lead to improved management of the client’s expectations and greater commitment between advisor and client. This in turn will increase customer satisfaction. And if you automate this properly, you will generally spend less time determining a risk profile because the processes are organized more efficiently and one does no longer have to enter the whole questionnaire for every product.”

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