Secondary

Views on Risk Profiling

Last Monday’s article on the on the Smit determination, which involved an investment in the Dynamic Wealth MR Property Fund, certainly drew a lot of discussion. An experienced broker, and long time personal friend, sent me the following e-mail:

I chose not to comment on your article as I do not want to differ with you publicly. (These points are relevant to the discussion, and I appreciate the value it adds to the argument.)

For me, there are for 3 aspects to consider.

  1. Property as an asset class and Risk.
    The Ombud acknowledged that the product provider’s literature had noted that it was a low risk product; however, they took it upon themselves to allocate a risk rating of “moderate to high”. How does the Ombud make that assumption without detailed research? I thus have a serious problem with this aspect of their judgement.On the standard risk/return matrix in all recognised publications, property as an asset class is on the lower end of the spectrum. If we use the Profile Unit Trust publication—it will reflect the range starting from cash, money market, income funds, low equity prudential funds, and then both bond and property are about the same risk. We then escalate to prudential funds—and we have not yet reached normal balanced funds. The problem, however, is that a single asset allocation fund always has an added risk – even though the asset class is lower on the risk spectrum. This complicates the risk assessment. I attach Old Mutual and Marriott property fact sheets: they rate themselves as moderate [Marriott] and moderate to high (Old Mutual). The latter often tends to over rate the risk on all their funds, in my view.The point of the above is that the rating assessment by the Ombud hurt the respondent.

    Thus property, I would say, is a moderately cautious asset class—but then you have to look at the specific fund. I know zip about this fund—but if it is pushing the envelope for returns – then its risk profile changes. Thus in this context the FSB may be right.

  2. The Product Provider
    I did not know Dynamic Wealth, other than rumours. That said, if they were offering higher than normal incentives – then the IFA is at risk. (To the best of my knowledge, they paid the standard commission rates) 
  3. RISK PROFILING.
    I don’t take this exercise seriously enough. That said, my report, and discussion with the client, position investment in terms of risk, but come a bad market down turn, I can be faced with a sanctimonious hind sight assessor.

The moral of the story for me – and all us IFAs – is that we have to place more emphasis on risk profiling, even if for the sole purpose of protecting ourselves.

Is this a fair decision by the Ombud? It is hard to say. From my perspective, if I were the advisor, I definitely would not have recommended cash or income funds, given the market

then, and the clients’ desire for extra return. That said, I would never have placed in a pure property fund, but would probably have used a combination of ‘low equity prudential’ and ‘fixed interest varied’ funds.

This is my honest and opinionated feedback which is probably wrong, but hopefully enough to help you a bit with this ongoing debate.

I am sure that many reading this will agree, while others will not. That is the nature of the advisory business. What is concerning is that many advisors are now going through the motions required to protect themselves against possible legal consequences, rather than do what is right for the client, which is what it all is supposed to be about, not so?

You are welcome to share your views below.

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