You will be able to separate how much risk a client wants to take from how much they can afford to take.
Siew Lan is 58 and plans to stop working in four years. Her risk questionnaire comes back "aggressive". She tells Wei Ling she has watched friends make money in the market and does not want to be left out. Later in the same meeting she mentions that most of her savings are earmarked for that retirement, and that she still has a small mortgage. Her questionnaire recorded how she feels about risk, and it had nothing to say about what her finances could survive.
Risk profiling mixes up two things that need to be kept apart.
Risk attitude is how the client feels about losses: how much ups and downs bother them, and how they would react if an investment fell, which comes down to temperament and experience. Some people sleep fine through a market fall. Others check their app every hour and sell at the bottom.
Capacity for loss is what the client's finances can actually absorb. It depends on things you collected in lesson 3.3, Finances, existing cover and CPF: how soon they need the money, how much of their wealth this is, what else they have to fall back on, whether they have debts to service and people relying on them.
The two can point in opposite directions. A young professional with secure income, no dependants and a twenty-year horizon may have a cautious attitude but plenty of capacity. Siew Lan has the reverse: an adventurous attitude and very limited capacity, because she needs the money soon and has little else to fall back on if it falls in value.
Your firm will have a risk profiling questionnaire. Use it, every time, as your firm requires. It gives a consistent starting point and a record.
Treat the result as a starting point. Questionnaires ask hypothetical questions, and people answer hypothetical questions optimistically. Someone who says they would hold on through a 20 percent fall may never have seen one in their own money. So after the questionnaire, test the result against what the client tells you about their real behaviour.
Ask about the past. "Have you ever had an investment fall in value? What did you do?" "When markets dropped sharply in a past year, did you check your investments? Did you change anything?" "How did you feel?" A client who sold everything in a past fall has told you more than any questionnaire answer. A client who has never invested has told you their answers are untested, which is worth noting too.
Specific amounts work better than percentages. "If the S$100,000 you put in was worth S$75,000 a year later, what would you do?" Use the client's own figures where you can, and label them as an example. Percentages feel abstract. Dollar amounts from their own savings do not.
Wei Ling asks Siew Lan what she did when her CPF investment scheme holdings fell some years ago. Siew Lan says she sold them and moved the money back into her CPF accounts, and that she "couldn't sleep" while they were falling. That is useful evidence, and it sits uneasily with "aggressive".
When the two disagree, the lower one usually sets the limit. If a client is happy to take risk but cannot afford to lose the money, capacity wins. If a client could afford to lose but would be distressed by it and likely to sell at the worst time, attitude wins.
Whichever limit applies, explain it to the client in plain words. Siew Lan hears: "Your answers show you're comfortable with ups and downs, and I believe you. But this money needs to fund your retirement in four years, and you've told me there isn't much else behind it. If it fell by a quarter just before you stopped work, there wouldn't be time for it to recover. So I'll be suggesting less risk than your questionnaire shows, and here's why."
Some firms' processes require the questionnaire result to be overridden or adjusted formally when you do this. Follow your firm's procedure, and make sure the reason is written down.
Sometimes, after the explanation, the client still wants more risk. Siew Lan might say she understands and still wants an aggressive fund with a large part of her savings.
Record it. Write down what the client wanted, what you said about the risks and why you thought it unsuitable, and what they decided. Use their words for their reasons and yours for your warning. Lesson 4.4, When the client wants something you did not recommend, covers what happens next and the extra process your firm may require. For now, the point is that the record should exist, and that you make it at the time while the conversation is fresh.
The gap between how clients answer a questionnaire and how they behave with real money is where most risk mistakes start. The best protection is a short set of follow-up questions you ask every time, about real past behaviour and real amounts. In the activity below you write those questions, ready for your next risk conversation.
Write the questions you will ask after a risk questionnaire to test whether the result matches the client's real behaviour with money.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).