Risk profiling potential investors has always been carried out according to a certain methodology. Based on the client’s risk profile and their psychology, a risk profile is then applied to their portfolio. The effectiveness of risk profiling has however come into question, in terms of its efficacy to deliver the returns that the client needs. Often, risk profile and return will be in contradiction with one another. Patrick Barker, Private Client Portfolio Manager at Cannon Asset Managers joined Alec Hogg on CNBC Africa to discuss the different approaches and what may indeed better serve the investor. – LF
ALEC HOGG: Welcome back to Power Lunch on this Friday, the 25th. Well, the effectiveness of risk profiling has become rather topical lately. Patrick Barker, who is Private Client Portfolio Manager at Cannon Asset Managers, is in Durban where we don’t have a studio, unfortunately, but of course, we have many of South Africa’s brightest people. Patrick, it’s nice to have you on the telephone line to us. Just for those who aren’t familiar with what risk profiling is all about, how about giving us a thumbnail sketch.
PATRICK BARKER: Thank you for interviewing me, Alec. Just briefly, risk profiling is designed to establish the risk tolerance of an investor. Generally, we use questionnaires for it and included in that questionnaire is a fair amount of psychology. That’s probably the briefest summary in terms of it.
ALEC HOGG: So why is it applied or why has it become so topical?
PATRICK BARKER: The marketplace is currently doing risk profiling as a measure-to-measure tolerance. There are two schools of thought. The first school of thought is saying you should actually sit with an investor; establish what their needs are and from there, you should actually be telling them what risk profile they need to invest in. For example, if their needs are that they have to produce 15 percent per annum to reach their goals, that would probably be an aggressive investor and you need to say to the investor ‘that’s the risk profile you have to have’ and then you allocate assets according to that. The second school of thought is saying ‘rather use the risk profile questionnaire because you’re going to establish the psychology of that investor as well establishing what sort of asset allocation they need’. Then you can work with the investor when they start having a wobble about the asset allocation you’ve chosen.
ALEC HOGG: So it’s more a question of finding out from the questionnaire what that person’s risk profile actually is, rather than telling them what it should be.
PATRICK BARKER: Yes, it is and I think the view that you have to take is probably to apply both. If you have an investor who needs 20 percent per annum in terms of their needs, their current assets, and their future aspirations – but they actually come out moderately conservative in their risk profile, those two probably don’t go together and the questionnaire will help establish that. I’m not saying that the questionnaires and the be-all and end-all. I think they really need to be worked on but the bottom line is we need to establish that client psychology.
ALEC HOGG: Fascinating insights there on risk profiling from Patrick Barker. He’s the Private Client Portfolio Manager at Cannon Asset Managers.
