The Risk Profiler. What is risk? Risk and return. What is your risk profile? Financial Planning - Risk Profiler Page 1 of 7

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1 The Risk Profiler What is risk? Risk is one of the most difficult concepts to explain and far more difficult to quantify. There are a number of definitions but one of the easiest to understand is Risk is the chance you will make either a gain or loss when you invest, and importantly the degree of that potential gain or loss. Risk and return One of the most important steps in developing an appropriate investment strategy is to understand the correlation between your objectives, desired return and your individual tolerance to risk and timeframe. The challenge is for you to: a) Make an accurate and meaningful assessment of your willingness to accept risk based on what it means to you. b) Assess your investment return goal and the level of risk involved in attempting to achieve that return. c) Have a means to express this assessment compared to the risk/return level of your current portfolio. d) Understand and consider the various alternatives, and the trade-offs that might be required. What is your risk profile? This Risk Profiler is designed purely as an indicator that may help you understand how comfortable you are with accepting certain levels of risk before investing. Please take the time to answer these questions as they will assist your authorised representative to develop and provide appropriate recommendations. The output of this Risk Profiler does not constitute any kind of personal advice and should never be relied upon when making a decision in relation to a particular financial product or strategy. It is also important to note that risk profiling is only one element of the overall financial planning process. This tool does not provide you with financial advice of any kind about a particular financial product or strategy and is not a substitute for a detailed financial plan. Please note that you may decline to provide the information requested, but you should note that your adviser s recommendations and obligations will be limited accordingly and you will need to determine whether the advice provided suits your individual circumstances. Financial Planning - Risk Profiler Page 1 of 7

2 Risk Profiler form 1. Which of the following best describes your current stage of life? a) Single with few financial commitments. You may be keen to accumulate wealth for the future. Some funds must be kept available for enjoyment such as cars, clothes, travel and entertainment. b) A couple without children. You may be preparing for the future by establishing and furnishing a home. There are a lot of things you need to buy. c) Young family. This is the peak home purchasing state. You may have a mortgage and a very small amount of savings. d) Mature family. You may be in your peak earning years and may have the mortgage under control. Your partner may also work and children are growing up and have either left home or are less financially dependent. You may be starting to think about retirement, although it may be years away. e) Preparing for retirement. You may own your home and have few financial commitments; however you want to ensure that you can afford a comfortable retirement. f) Retired. You may no longer be working and must rely on existing funds and investments to maintain your lifestyle. You may be receiving the pension and are keen to enjoy life and maintain your health How familiar are you with investment markets? Your response Agreed AR use a) Not at all b) Not very familiar/very little understanding. c) Have enough experience to understand the importance of diversification. d) Understand the markets may fluctuate and that different market sectors offer different income, growth and taxation characteristics. e) Experienced with all investment sectors and understand the various factors which may influence performance. Financial Planning - Risk Profiler Page 2 of 7

3 3. How long have you been investing, not counting your own home, superannuation or bank type deposits? a) 3 year or more. b) Up to 3 years. c) This is my first investment For how long do you expect this invested money to last? a) I will need most of it returned to me in less than 2 years b) I will need most/all of it returned to me between the next 2 to 5 years. c) I will need most/all of it returned to me between the next 5 to 10 years. d) I need it to last at least 10 Years but it may be all spent or withdrawn before I die. e) I need it to last lifetime and I may wish to have some left over after I die. 5. Historically, the share market has experienced rapid rises and falls in value. If the share component of your portfolio fell by 40% over a short period, such as a month, would you: a) Sell all of the investments. Security of your capital is critical and you do not intend to take risks b) Sell a portion of your portfolio to cut your losses and reinvest into more secure investment sectors. c) Hold the investment and wait to see if the investment performance improves. d) Invest more funds. e) Borrow money to invest more funds. Financial Planning - Risk Profiler Page 3 of 7

4 6. Which one of the following statements describes your feeling towards choosing an investment? a) I would prefer investments with little or no fluctuation in value and have a low degree of risk associated with them. I am willing to accept the lower return associated with these investments at the risk of my capital being depleted prematurely. b) I prefer to diversify with a mix of investments that have an emphasis on low risk. I am happy to have a small proportion of the portfolio invested in assets that have a higher degree of risk in order to achieve a slightly higher return. I am prepared to accept a negative investment return of 1 in 10 years. c) I prefer to have a spread of investments in a balanced portfolio. I am happy to have negative return of 1 in 7 years. d) I prefer to diversity my investments with an emphasis on more investments that have higher returns, but still having a small amount of low risk investments. I am prepared to accept a negative return of 1 in 5 years. e) I would only select investments that have a higher degree of investment price fluctuati9on so that I can earn higher long term returns. I am happy to accept a negative return of 1 in 3 years in order to achieve this goal How much of a fall in the value of superannuation can you withstand before deciding to switch to cash? a) 40% or more b) 30% c) 20% d) 10% e) 0% Your score Financial Planning - Risk Profiler Page 4 of 7

5 Risk profile descriptions Score Indicative risk profile Highly Conservative You are a Cash Investor. Risk must be very low and you are prepared to accept lower return to protect your capital. The negative effects of tad and inflation will not concern you, provided your initial investment is protected. Conservative You are a Conservative investor seeking better than basic returns, but risk must be low. Your priority remains the preservation of capital over the medium to long term. You may have some understanding of investment markets and be prepared to consider less aggressive or low growth investments. Balanced You are a Moderate or Balanced investor who wants a balanced portfolio to work towards medium to long term financial goals. You require an investment strategy which will cope with the effects of tax and inflation. Calculated risks are acceptable to you. Assertive You are an Assertive investor, probably earning sufficient income to invest most funds for capital growth. You are prepared to accept higher volatility and moderate risks; your primary concern is to accumulate assets over the medium to long term. You require a balanced portfolio, but more aggressive investments may be included. Growth You are a Growth investor who understands the movement of investment markets. You are most interested in maximising long term capital growth, although you do not wish to make unbalanced investment decisions. You are happy to sacrifice short term safety in 9order to maximise long term capital growth. Aggressive/High Growth You are an Aggressive investor prepared to compromise portfolio balance to pursue potentially higher long term returns. Your investment choices are diverse, but carry with them a higher level of risk. Security of capital is secondary to the potential for wealth accumulation. Ratio of Growth/ Income Based Assets (%) 0/100 30/70 50/50 70/30 85/15 100/0 Financial Planning - Risk Profiler Page 5 of 7

6 Your acknowledgement I/We (full name) hereby acknowledge that: Please select one (1) of the following: The above investment risk profile is consistent with my/our investment risk requirements and profile. I/We have had the concept of investment risk explained to me/us and I am/we are happy to proceed on this basis. The above investment risk profile is not consistent with my/our risk requirements and profile which I/we hereby nominated to be considered as: Client, please select one (1) of the following: Client Partner, please select one (1) of the following: Partner Highly Conservative Assertive Highly Conservative Assertive Conservative Growth Conservative Growth Balanced Aggressive Balanced Aggressive I/We, therefore authorise you to proceed on this basis. Client signature: Date: Partner signature: Date: Financial Planning - Risk Profiler Page 6 of 7

7 Investor Type/ Risk Profile (asset allocation guide for Advisers) The asset allocation for each risk profile is as follows: Asset Class Range Cash Fixed Interest Aust. Shares International Shares Property When undertaking a financial plan for a client your aim is to match the risk profile asset allocation and the overall asset allocation of the client s total portfolio (including existing and recommended investments) within 10% for each asset class. For example if the target assets allocation for Australian shares is 30% your aim is to achieve somewhere between 20% and 40%. However there are occasions when this is not possible. For example a client may have an existing investment property or share portfolio and as a result the overall portfolio asset allocation is overweight in property or shares. In situations like this it will be impossible to keep the portfolio asset allocation within the 10% range of the risk profile asset allocation. Sometimes a client s financial objectives dictate the recommended strategy and, as a result, the portfolio asset allocation. For example you may recommend a capital guarantee strategy to a customer who has an objective of wealth accumulation with the recommended asset allocation being 100% in Australian shares. There is no problem with having an asset allocation outside the risk profile target range providing you clearly explain the reasons for this in your letter of recommendation and add the below comment; If you do not feel comfortable with the overall asset allocation of the recommended portfolio do not proceed without further discussion with me In limited scope of advice situations there will often be discrepancies between the asset allocation of the client s risk profile and your recommendations. This is because the risk profile asset allocation relates to the client s total position and the recommendation relates to a specific amount of money to be invested for a specific purpose Once again an explanation which states the reasons for the discrepancies is required in your written recommendation and this would satisfy one of your obligations under the know your client rule and suitability test in order to meet the reasonable basis for advice. Financial Planning - Risk Profiler Page 7 of 7