C L I E N T R I S K P R O F I L I N G A P P R O A C H

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1 H E A L T H W E A L T H C A R E E R C L I E N T R I S K P R O F I L I N G A P P R O A C H P R E P A R E D F O R H U B B I S Steven Seow June 217

2 C L I E N T R I S K P R O F I L I N G AN INT RODUCT ION TO CLIENT RISK PROFILING MERCER MERCER 216 2

3 C L I E N T R I S K P R O F I L I N G G O A L O F C L I E N T R I S K P R O F I L I N G C L I E N T R I S K P R O F I L I N G Identify clients true risk tolerance Assess clients willingness and capacity to take risk Segment clients into Risk Profiles High Risk Aggressive Balanced Conservative Cautious G E N E R AT E I N V E S T M E N T R E C O M M E N D AT I O N MERCER 217 3

4 C L I E N T R I S K P R O F I L I N G P R O C E S S O V E R V I E W Assess clients willingness and capacity to take risk Segment clients into risk profiles Qualitative and quantitative anchors to align with PRR Regulatory requirements Fit for purpose In line with industry peers BASIS FOR CRP ANCHORS RISK DRIVERS ITERATIVE OPTIMISATION Achieve the best fit to the target outcomes based on set of scores MERCER DECISION TREE Sets out the map of target outcomes with reference to anchors, knock-outs and constraints CUSTOMISATION OF QUESTIONS Wording analysis Small sample testing MERCER 217 4

5 C L I E N T R I S K P R O F I L I N G BASIS FOR CLIENT RISK PROFILING MERCER MERCER 216 5

6 C L I E N T R I S K P R O F I L I N G O B J E C T I V E S A N D P R I N C I P A L C O N S I D E R A T I O N C A PA C I T Y W I L L I N G N E S S T I M E H O R I Z O N I N V E S T M E N T O B J E C T I V E F I N A N C I A L S I T U A T I O N R I S K T O L E R A N C E A T T I T U D E T O R I S K Neither willingness nor capacity of an investor to take risk should be aggregated away in deriving the final risk profile of the investor. BASIS FOR CRP ANCHORS RISK DRIVERS CUSTOMISATION OF QUESTIONS MERCER DECISION TREE ITERATIVE OPTIMISATION MERCER 217 6

7 C L I E N T R I S K P R O F I L I N G C O M M O N G R O U N D L E A D S T O 1 - TO- 1 M A P P I N G C R P 5 C R P 3 C R P 4 C L I E N T R I S K P R O F I L I N G C R P 2 C R P 1 P R O D U C T R I S K R AT I N G P R R 1 P R R 2 P R R 3 P R R 4 P R R 5 BASIS FOR CRP ANCHORS RISK DRIVERS CUSTOMISATION OF QUESTIONS MERCER DECISION TREE ITERATIVE OPTIMISATION MERCER 217 7

8 C L I E N T R I S K P R O F I L I N G 1 - TO-1 M A P P I N G D E F I N I N G E A C H R I S K P R O F I L E R I S K P R O F I L E D E S C R I P T I O N A C C E P T A B L E V O L A T I L I T Y C O N D I T I O N A L V A R ( C V A R ) C R P 1 I want to keep up with inflation. I am comfortable with taking very low levels of fluctuation to the value of my investments..1% to 4%.1% to.67% C R P 2 I want to beat inflation. I am comfortable with taking low levels of fluctuation to the value of my investments. 4.1% to 6.5%.68% to 1.8% C R P 3 I want to achieve moderate capital growth. I am comfortable with taking moderate levels of fluctuation to the value of my investments. 6.51% to 8.5% 1.9% to 1.41% C R P 4 C R P 5 I want to achieve high levels of capital growth. I am comfortable with taking high levels of fluctuation to the value of my investments. Connecting the Dots The CRP and PRR frameworks are part of processes and procedures in place to > 1.5% address Client Investment Suitability. I want to maximise my return. I am comfortable with taking significant levels of fluctuation to the value of my investments, including the possibility of losing more than my initial investments. 8.51% to 1.5% 1.42% to 1.75% > 1.76% BASIS FOR CRP ANCHORS RISK DRIVERS CUSTOMISATION OF QUESTIONS MERCER DECISION TREE ITERATIVE OPTIMISATION MERCER 217 8

9 R I S K D R I V E R S I N L I N E W I T H I N D U S T R Y P E E R S N U M B E R O F C L I E N T R I S K P R O F I L E S I N F R A M E W O R K R I S K D R I V E R S C O N S I D E R E D I N C L I E N T R I S K P R O F I L I N G Q U E S T I O N N A I R E S 6 P R O F I L E S 7% 7 P R O F I L E S 7% W I L L I N G N E S S 93% 3 P R O F I L E S 38% C A PA C I T Y 73% 5 P R O F I L E S 5% K N O W L E D G E / E X P E R I E N C E 27% O T H E R S 2% BASIS FOR CRP ANCHORS RISK DRIVERS CUSTOMISATION OF QUESTIONS MERCER DECISION TREE ITERATIVE OPTIMISATION MERCER 217 9

10 C L I E N T R I S K P R O F I L I N G QUESTION T YPES MERCER MERCER 216 1

11 C L I E N T R I S K P R O F I L I N G Q U E S T I O N T Y P E S A N C H O R Q U E S T I O N K N O C K - O U T R E S P O N S E O T H E R C O N S T R A I N T S Responses to this question will largely determine the final risk profile. Responses to subsequent questions can result in final risk profile that deviates slightly from the one determined by anchor question but the deviation is within a defined limit. A knock-out response puts an investor in a specific risk profile as determined based on the nature of that response. Responses to subsequent questions have no further effect in adjusting the final risk profile of an investor, from that determined by the knock-out response. There can be overall rules that are applied across all questions in order to ensure consistency in scoring methodology and prevent the score of one response from overshadowing another unnecessarily. BASIS FOR CRP ANCHORS RISK DRIVERS CUSTOMISATION OF QUESTIONS MERCER DECISION TREE ITERATIVE OPTIMISATION MERCER

12 Q U E S T I O N T Y P E S N A R R O W I N G D O W N L I S T O F Q U E S T I O N S I N I T I A L L I S T O F 1 Q U E S T I O N S D I S C U S S I O N A N D 2 F E E D B A C K 3 M E R C E R M A K E S R E C O M M E N D AT I O N S Question 1 Question 2 Question 3 Question 4 Question 5 Question 6 Question 7 Question 8 Question 9 Question 1 Question 11 Question 12 Question 1 no, remove Question 2 refine Question 3 refine Question 4 good, keep Question 5 good, keep Question 6 reword Question 7 good, keep Question 8 reword Question 9 good, keep Question 1 reword Question 11 no, remove Question 12 good, keep Question 1 no, remove Refined Question 2 Refined Question 3 Question 4 Question 5 Reworded Question 6 Question 7 Reworded Question 8 Question 9 Reworded Question 1 Question 11 no, remove Question 12 BASIS FOR CRP ANCHORS RISK DRIVERS CUSTOMISATION OF QUESTIONS MERCER DECISION TREE ITERATIVE OPTIMISATION MERCER

13 C L I E N T R I S K P R O F I L I N G DECISION T REE MERCER MERCER

14 D E C I S I O N T R E E I N T R O D U C T I O N 1 W H A T I S T H E D E C I S I O N T R E E? A map of a set of target outcomes that we want to achieve based on the possible combination of responses H O W I S T H E D E C I S I O N T R E E C O N S T R U C T E D? Parameters addressing regulatory requirements and internal needs are incorporated to questionnaire via 3 mechanisms: Anchor question(s) Knock-out response(s) Other constraints(s) 3 W H A T D O W E D O W I T H T A R G E T O U T C O M E S? Used as input into iterative optimisation process to solve for solution BASIS FOR CRP ANCHORS RISK DRIVERS CUSTOMISATION OF QUESTIONS MERCER DECISION TREE ITERATIVE OPTIMISATION MERCER

15 D E C I S I O N T R E E A N C H O R S A N C H O R Q U E S T I O N K N O C K - O U T R E S P O N S E Assuming Question 1 is the anchor question, and the investor picked Response 2, the option corresponding to the Defensive risk profile, he will be placed in the Defensive category unless for the following instances: Q U E S T I O N 1 Q U E S T I O N 2 Q U E S T I O N 3 Q U E S T I O N 4 Response 1 Response 1 Response 1 knock-out F I N A L R I S K P R O F I L E Very defensive CRP 1 #1 Instance #1 He is more conservative in most of his other responses, in which case, he will be downgraded a notch to Very Defensive, or he picked a knock-out response that places him in a specific category. Response 2 (Defensive) Response 2 Response 3 Response 4 Response 5 Response 1 Response 2 Response 3 Response 1 knock-out Very defensive CRP 1 #1 Instance #2 Response 4 Response 2 Defensive CRP 2 He consistently picked very aggressive responses for the remaining questions, in which case, he will be upgraded to Moderately Defensive. We do not recommend an upgrade of more than 2 notches from the anchor response. Response 5 Response 3 Response 4 Response 5 Defensive CRP 2 Moderately defensive CRP 3 Moderately defensive CRP 3 #2 #2 BASIS FOR CRP ANCHORS RISK DRIVERS CUSTOMISATION OF QUESTIONS MERCER DECISION TREE ITERATIVE OPTIMISATION MERCER

16 D E C I S I O N T R E E A N C H O R S A N D K N O C K O U T S Q 1 : I N V E S T M E N T T I M E H O R I Z O N How long do you intend to remain invested? This refers to the overall time you intend to stay invested in the market. Less than 2 years 2 to 3 years 3 to 5 years 5 to 1 years More than 1 years Q 2 : I N V E S T M E N T N E E D S Q 3 : S A V I N G S A B I L I T Y / L I Q U I D I T Y Which of the following statements best describes the reliance on this account to meet your financial needs? (Please only select one.) I want to use the investments in this account to meet part or all of my on-going financial needs. I want to use the investments in this account to meet my future financial needs. I do not rely on the investments in this account to provide for any of my financial needs. Which of the following statements best describes the need to withdraw investments from this account when faced with an unplanned and immediate need for a large amount of cash? (Please only select one.) Unlikely. Likely. Very likely. Q 4 : F I N A N C I A L O B L I G A T I O N Do you have a planned expenditure that requires you to drawdown at least 3% of your investments in this account? If so, when will this be? (Please only select one.) No. Yes, within the next 2 years. Yes, between the next 2 to 5 years. Yes, more than 5 years. K N O C K - O U T R E S P O N S E Knock-out responses can also be implemented for the other questions Certain risk profiles should be knocked-out for investor who indicated plans to use a significant amount of money from the account to meet a near term financial obligation Additional knock-out can also be implemented for the next conservative response, next 2 to 5 years, for instance to exclude access to the most risky product risk category with products that could be highly volatile or extremely illiquid investments. BASIS FOR CRP ANCHORS RISK DRIVERS CUSTOMISATION OF QUESTIONS MERCER DECISION TREE ITERATIVE OPTIMISATION MERCER

17 C L I E N T R I S K P R O F I L I N G QUESTIONNAIRE DEM O MERCER MERCER

18 C L I E N T R I S K P R O F I L E S S C O R I N G B A N D S / S C O R I N G M A T R I X Scoring Matrix Risk Appetite (Willingness) C1 Low C2 Medium C3 High C4 Very High Above 161 C1-64 C1 C1 C1 C1 Risk Taking Ability (Capacity) C C1 C2 C2 C2 C C1 C2 C3 C3 C4 Above 15 C1 C2 C3 C4 MERCER

19 Q U E S T I O N 1 L O S S T O L E R A N C E 1. What is the maximum loss to your portfolio you are likely to be comfortable with? Up to 5% on the downside More than 5% but less than 15% More than 15% but less than 3% More than 3% Q W I L L I N G N E S S C A P A C I T Y MERCER

20 Q U E S T I O N 2 L E V E L O F A C C E P T A B L E F L U C T U A T I O N 2. Investment value can go up and down over time. What is the highest level of price fluctuation that you are willing to accept? to +1% -3 to +8% -11 to +16% Q to 28% 35 Q1 7 W I L L I N G N E S S C A P A C I T Y MERCER 217 2

21 Q U E S T I O N 3 I N V E S T M E N T G O A L / R I S K - R E T U R N E X P E C T A T I O N 3. Which of the following best describes the investment goal you expect to achieve? Risk Appetite: C3 To keep up with inflation To beat inflation Q To achieve moderate capital growth Q To achieve aggressive return 52 Q1 7 W I L L I N G N E S S C A P A C I T Y MERCER

22 Q U E S T I O N 4 L I Q U I D I T Y O F I N V E S T M E N T P R O D U C T 4. During its expected investment horizon, the value of a long term investment may suffer from substantial price drop and thin trading. Are you prepared to hold on to such investments? No, I will need to sell the investment immediately at whatever price available to prevent further losses. Yes, I can hold onto my investment for a short period of time 3 Risk Appetite: C Q3 32 Q Yes, I can hold onto my investment for a longer period of time as I am expecting growth over the long term. 41 Q1 7 Q1 41 Yes, I can hold onto my investment for a longer period of time and may also consider buying more. 62 W I L L I N G N E S S C A P A C I T Y MERCER

23 Q U E S T I O N 5 N E T W O R T H 5. What percentage of your liquid net worth are you able to set aside for investment? Risk Appetite: C Less than 1% 1% to less than 3% 3% to less than 5% Q3 32 Q2 35 Q % or more 63 Q1 7 Q1 41 W I L L I N G N E S S C A P A C I T Y MERCER

24 Q U E S T I O N 6 I N V E S T M E N T T I M E H O R I Z O N 6. Under general market conditions, how long do you plan to maintain your portfolio s market exposure? Risk Appetite: C Risk Taking Ability: C4 154 Q Less than 6 months 6 months to less than 1 year 1 to less than 3 years Q3 32 Q2 35 Q years or more 61 Q1 7 Q1 41 W I L L I N G N E S S C A P A C I T Y MERCER

25 S A M P L E R I S K P R O F I L E Q U E S T I O N N A I R E R I S K P R O F I L E Q U A L I T A T I V E D E S C R I P T O R S R I S K P R O F I L E Q U A L I T A T I V E D E S C R I P T O R C1 Low This is a low risk profile. I wish to achieve a regular income only. I expect very low volatility in my investments and am prepared to accept low to very low losses. C2 Medium This is a medium risk profile. I am seeking moderate appreciation of my investment asset value. I expect moderate volatility in my investments and am prepared to accept moderate losses. C3 High This is a high risk profile. I am seeking capital gain. I expect to participate in high growth opportunities with high risks and am generally comfortable with losing a portion of or all of my principal invested. C4 Very high This is a very high risk profile. I am looking for my investments to grow aggressively and earn the highest possible return. I am generally comfortable with maximized risk and the possibility of loss exceeding my principal invested. MERCER

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