Balancing the risk

Providend maintains that using the risk profiling questions alone is insufficient to adequately suss out a client's risk attitude. Besides assessing risk tolerance, it seeks to understand the client's risk capacity and ability to take risk.

It believes that it is able to really understand a client's risk appetite only after these three factors are aligned.

The three factors help determine the amount of risk that should be taken in a portfolio of investments.

The problem many investors face is that their risk tolerance, risk capacity and risk ability are not the same.

This is where the adviser's responsibility comes in. Even if an investor appears to have an appetite for a product with a certain amount of risk, the adviser must steer him away if he feels that the client does not have the capacity and ability to take the risk, said Mr Stanley Jeremiah, council member of the Singapore Insurance Institute.

'For instance, the doctor cannot say he prescribed sleeping pills because that was what the client wanted. In the same way, the adviser or the financial institution cannot say that he or it sold a client a high-risk investment which was not suitable for him because of the client's lack of risk ability, simply because that was what the client wanted,' said Mr Jeremiah.

'As professionals, they owe a duty of care and they should give professional advice including advising an eager customer against investments which are unsuitable for the customer.'

Mr Tan agreed, saying: 'We don't give in to a client's wants. Only a salesman does that. We are a fiduciary, we advise clients and sometimes that means going against what they want.'

Mr Lim said that when customising a portfolio, StanChart considers a customer's risk capacity and ensures that thresholds are adhered to.

In a scenario where making an investment would result in a breach of these thresholds, the bank will either advise the customer to reduce his investment amount to a level within his risk capacity or advise him against making the investment.

This article was first published in The Straits Times.

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