The importance of risk profiling for investors - CNBC Africa

The importance of risk profiling for investors


by Trust Matsilele 0

According to experts, risk profiling is essential for investors. PHOTO: Terrapin

Patrick Barker, a private client portfolio manager with Cannon Asset Managers told CNBC Africa that the risk profiling is an attempt to establish the risk tolerance of an investor.

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“Generally, questionnaires are used for that and increasingly the questionnaire is used as a matter of establishing the psychology of an investor,” noted Barker.

“There are two major schools of thought, the first encompasses establishing the needs of investors while the second option involves understudying an investor through a questionnaire so one will be able to establish the psychology of an investor and asset need.”

According to Risk Tolerance Experts, risk profiling is a process for finding the optimal level of investment risk for your client considering the risk required, risk capacity and risk tolerance.

Among others, the process involves ascertaining risk required which is the risk associated with the return required to achieve the client’s goals from the financial resources available.

“Risk profiling requires each of these characteristics to be separately assessed so that they can be compared to one another,” noted The Risk Tolerance Experts.


The experts also added that risk capacity is also established, which is the level of financial risk the client can afford to take, and risk tolerance which is the level of risk the client is comfortable with.

According to the experts, the risk tolerance is a psychological characteristic which is best determined by way of a psychometric test.

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“Risk capacity and risk tolerance both act separately as constraints on what your client might otherwise do to achieve their goals (risk required). It is unusual for a client to be able to achieve their goals from the resources available within both their risk capacity and risk tolerance,” the experts added.

“Where a mismatch between risks required, risk capacity and risk tolerance has been found, the advisor’s role is to guide the client through the trade-off decisions that are required to reach an optimal solution.”

The Risk Experts explained that the final step in the risk profiling process is to ensure that the client has realistic risk and return expectations so that the advisor can be given the clients properly informed consent to implement the investment strategy.