As the Financial Planning Institute of Southern Africa (FPI) NPC prepares for the inclusion of the Psychology of Financial Planning into our financial planning competency and curriculum standards, it is important to reflect on how clients see risk when it comes to investments and especially retirement planning.
Risk profiling as a component of the suitability of financial advice is not fully appreciated.
Things we know about the South African savings culture:
- We do not save enough for retirement or we start saving too late.
- At retirement, we want to draw the maximum income with the minimum impact on our capital and expect our post-retirement funds to last for as long as we live.
- We expect financial planners and/or financial advisors to work miracles during our golden years to ensure that our annuity income does not decrease, despite the cost of living continuously rising in the face of escalating inflation, pandemics and wars.
The above highlights the critical importance of clients seeking professional financial advice and having financial planning strategies in place as soon as they start earning a pensionable income. While benefit counselling has its place, it is far too late for someone to do something about their retirement savings when they retire from their employer at for example the age of 65 years old.
In unpacking the Office of the Ombud for Financial Services (FAIS Ombud) annual report, it seems that we are still sitting with the following issues:
- Risk profiling as a component of the suitability of financial advice is not fully appreciated.
- Living/linked life annuity drawdown rates are in most cases still higher than the average rate of return of the underlying investment portfolios, resulting in capital depletion/annuity income running dry too soon.
What we need to appreciate is the importance of risk profiling as a component of the suitability of financial advice as well as understanding the psychology of financial planning. It is about having tough, relevant conversations with your client as soon as possible and conducting regular reviews of your client’s financial planning strategies. It is also about having a clear understanding of how a client sees risk and not the completion of a standard “Risk Profile Questionnaire” as the latter is not a compliance document but a tool to assist the financial advisor and the client to understand risk. The financial advisor must also be very careful not to allow his/her own bias or heuristics to influence the client’s ability to make an informed decision.
The compliance requirement on the other hand is that the financial advisor must establish the client’s risk profile by conducting a proper risk profile analysis to enhance the suitability of his/her professional advice and recommendations in the end.
We should not stare ourselves blind against the standard risk profiling questionnaires out there as they, many a times, contain inherent strong house views which could obstruct the advisor’s own thought process in applying his/her professional mind in understanding:
- How their client sees risk.
- If their client is willing to accept risk (risk tolerance).
- If their client can accept risk (risk capacity) to achieve their financial goals and objectives.
All of the above was discussed at length at FPI’s Annual Refresher that ran during January and February 2023. In case you missed it, you can still register to listen to the recordings.
It is furthermore membership renewal time at FPI – please and upload your FPI CPD records by 31 May 2023. Please do not leave this for the last minute as it only adds pressure on you.
Visit www.fpimymoney123.co.za or contact us on (011) 470 6000 or email us at firstname.lastname@example.org to find out how you can become a professional member of the FPI.
Until next time,
Lelané Bezuidenhout, CFP®, CEO,
Financial Planning Institute of Southern Africa