Risk is an integral part of any investment portfolio. Generally, the greater the reward from an investment, the higher the risk it carries. Therefore, for any wealth/fund manager or financial advisor, it becomes very important to identify, quantify and assess the risk before advising on what investments to make. He/she needs to match his/her clients’ attitude towards desired return and affordable risk, thus delivering more value to his/her clients. One way to evaluate risk preference of a person would be through a financial planning process called risk profiling. A basic definition of risk profile refers to a person’s willingness and ability to take risks.
Risk profiling involves a psychometric questionnaire. The process involves asking a range of questions from personal finance, desire to meet financial needs in different time frames i.e., short or long-term goals, ability to face a market downturn and so on. Based on a person’s answers to these questions, a risk score is calculated. The higher the score, the less risk averse the person is. In other words, a person whose risk score is high can tolerate more volatility in his/her portfolio (i.e. he/she is a risk lover). The questionnaire is designed to understand a person’s tolerance toward loss and related uncertainty. Other factors that might affect the risk score is the person’s age, income, other assets and existing and future liabilities. So, a wealth/fund manager or a financial advisor can design a personalised portfolio specifically to meet their clients’ needs with optimum amount of risk and serve them better.
In FinFlo Enterprise, we have an inbuilt risk profiling feature which helps financial advisors profile their clients’ risk attitude. The resulting risk score from our risk profiler is also used to suggest a possible asset allocation within the application, which if the financial advisor and the client choose to use, can be applied as their target asset allocation. We use statistical analysis to arrive at the ‘FinFlo suggested asset allocation’ based on the risk score, the client’s background and his/her existing and future financial conditions. The risk profiling process thus results in clients who are truly informed and understand the implications of the investments they are about to make.