When a couple presents for financial planning advice, one of the first things I’ll ask them to do for me is a risk profile questionnaire.
This is a multiple choice questionnaire designed to get a gauge of an individual’s attitude to risk. That is, how do they feel and react with movements, sometimes large movements, in the value of their investments. The answers to the questionnaire generate a score, and with this score we can, in broad terms, attribute to the individual a higher or lower tolerance for risk.
There’s no ‘right’ or ‘wrong’ in completing this questionnaire. A low or a high score isn’t good or bad, better or worse. However, it is a vital input when we come to prepare our investment recommendations.
And, it’s very important that each member of a couple completes their own questionnaire. Why? Because if there is a difference in how each member of a couple think and feel about risk, we’d want to identify this, discuss it and agree on the risk we’re prepared to accept in respect of what are, after all, investments that they have a common interest in (even though the assets themselves may be held in different names).
What might happen if we don’t consider each member of couple’s individual risk profile?
Say one member of a couple may have a high tolerance for risk. We might call them a ‘growth’ investor, comfortable with a higher level of exposure to growth assets like shares and property. The other member may have a lower tolerance for risk. We might call them a ‘conservative’ investor, more comfortable with a higher level of exposure to defensive assets like fixed interest.
Ignoring their differences on risk, and simply investing on the basis of ‘growth’ is likely to create all sorts of problems in the future. For example, say after 6 months the growth portfolio, which was constructed taking into account only the ‘growth’ investor’s preferences, drops 20%. The ‘growth’ investor won’t like it. However, he or she may be reasonably comfortable with the situation knowing perhaps that it’s a longer term investment in quality investments and is likely to recover in due course.
Their spouse, on the other hand, may well be fraught with concern and anxiety.
Having each of them complete their own risk profile questionnaire would have provided an opportunity at the beginning of the process to identify their differences on this point; discuss them and agree on an investment approach that met and managed both their expectations. It’s important to agree on risk.
Are you interested in a free initial consultation with one of our friendly advisers to know if your investments are invested for the right amount of risk? Call us today toll free on 1800 679 000 for our Rockhampton office and 1800 804 431 for our Melbourne office. One of our friendly advisers would be delighted to speak with you.
Robert is the Head of Financial Planning. He is responsible for the operational efficiency and effectiveness of the business. Robert is also a Financial Adviser who is passionate about helping people achieve their financial goals. Before commencing in management and financial planning, Robert acquired extensive experience in funds management and banking. He’s tertiary qualified (in economics), and holds the Certified Financial Planners designation. Robert works in our Melbourne office.
The information provided in this article is general advice only. It is prepared without taking into account your objectives, financial situation or needs. Before acting on the advice in this article, please consider the appropriateness of the advice, whether the advice is appropriate to you, your objectives, financial situation and/or needs, before following this advice.