Blue Chip Journal - June 2019 edition

CLIENT COACHING
risk-profiling approach to assessing
investors’ suitability for the investments
in which they invest. Neither of these
approaches have worked.
Investor education has failed
As Dalbar puts it: “After decades of
analysing investor behaviour in good
times and in bad times, and after
enormous efforts by thousands of
industry experts to educate millions of
investors, imprudent action continues
to be widespread.” Investor education
has tended to focus on investments
themselves and has effectively tried to
promote financial “literacy”, explaining
complex concepts to lay people. In effect
this is an attempt to provide a vocabulary
around investments.
To draw an analogy with the
health industry, attempts at financial
education have focused on the
medication and how it works, rather
than on how people can lead a healthy
lifestyle. The focus has been on the
aspirin and antibiotics, rather than
on nutrition, exercise and sleep. This
suggests that in order to address the
issue of investor behaviour, a greater
focus on the investors themselves is
necessary. In an effort to achieve this,
the second intervention by the industry
has been to apply a risk-profiling
approach to investors.
Risk profiling is a simple
but inadequate solution for
a complex problem
The theory of risk profiling is that if someone
knows their risk profile, they can invest in
a product/investment with a matching risk
profile. The problem with this approach is
it often only focuses on an individual’s risk
appetite or their propensity to take risk.
However, an investor’s investment risk
appetite tends to change as markets rise
and fall, hence the habit of buying high and
selling low.
A more comprehensive risk profile
would include a person’s financial capacity
to take risk and to question the extent to
which they can absorb loss. It would also
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