If you read my first blog post you would have noticed I have some pretty harsh views on the industry’s tool used to determine your risk tolerance, and in turn the return you should accept FOR THE REST OF YOUR LIFE. (Okay, maybe not the rest of your life, but at least for this investment and then we will do another Risk Profile Analysis (RPA) for the next investment, and the next. So I tick the box of performing an analysis whilst you answer 10 ridiculous questions meant to dictate your return expectations). Harsh I know, but after explaining my views, I will introduce you to the lifestyle orientated way of financial planning.
I used to use a well-known product suppliers RPA, but for the sake of this blog and to not stoke any fires, I have just googled a few, and illustrated them below, let’s take a look:
The current value of my savings/ capital (including equity in property, share, RA’s, provident funds etc.) is equal to (THIS QUESTION TELLS ME MORE ABOUT YOUR PERSONALITY THAN YOUR RISK TOLERANCE).
- Less than half my current (or last earned annual income) (I’M TO SHY TO TELL YOU).
- Half of my annual income (salary), pension, interest, etc.
- The amount of my gross income in one year (OH YEAH).
- Double my current (or last earned) annual income.
- Three times my current (or last earned) annual income.
- Five times my current (or last earned) annual income (I DON’T NEED TO BE HERE, I CAN DO THIS WITH OUT YOU).
Based on my lifestyle and medical history, I expect my risk of serious health problems over the next 10 years to be: (CRYSTAL BALL STUFF RIGHT HERE):
- Above Average
- Almost nil
My investment experience is best described as follows: (I LOVE THIS ONE, IT SHOULD BE CALLED, HOW I WANT MY ADVISOR TO SEE ME).
- I have never invested in equities, either directly or through unit trusts and do not understand these things. (THE HONEST CLIENT).
- I’ve invested a small amount of money in equities or unit trusts and/ or I know what these things are. (THE MODEST CLIENT).
- I’ve invested a fair amount of money in equities or unit trusts and/ or have a good understanding of equities. (THE AVERAGE CLIENT).
- I’ve invested in commodities, options and international shares and/ or am very knowledgeable about investment. (THE I’M BETTER THAN YOU CLIENT).
- I have a company retirement plan and/ or other investments, but I’m not sure exactly where I’m invested, and/ or I don’t fully understand the different asset classes. (I STILL HAVEN’T MET THIS CLIENT).
How do/ would you react to fluctuations in the market? (THE NEXT TWO ARE THE BEST, INSTEAD OF ME JUST ASKING WHAT YOU THINK YOUR RISK TOLERANCE IS, I’M GOING TO HIDE IT IN THESE TWO QUESTIONS):
- I am (or would be) very concerned if my investments lose value and am (or would be) inclined to sell immediately. (CONSERVATIVE).
- If an investment losses 5% over a quarter, I am (or would be) likely to sell and invest elsewhere. (MODERATELY CONSERVATIVE).
- I wait (or would wait) until I have watched the performance of an investment for at least a year before making changes. (MODERATE).
- Even if poor market conditions result in significant losses over several years, I will try and stick to a consistent long-term investment plan. (AGGRESSIVE).
You invest R100 000 for ten years. Given the best and worst-case scenario below, which investment option would you choose? (NB. Note that the best and worst-case scenario is equally possible).
- Best case outcome: R500 000 – Worse case outcome: R50 000 (AGGRESSIVE).
- Best case outcome: R850 000 – Worst case outcome: R20 000 (MODERATE).
- Best case outcome: R300 000 – Worst case outcome: R65 000 (MODERATELY CONSERVATIVE).
- Best case outcome: R150 000 – Worst case outcome: R100 000 (CONSERVATIVE).
When I buy car insurance, I: (MY ABSOLUTE BEST):
- Choose the lowest excess to ensure maximum cover even though my policy costs more.
- Choose a moderate level of excess in order to reduce the premium.
- Choose a high excess in order to pay a low premium even though losses may not be covered.
- Choose to carry no insurance.
As you can see from the above set of questions, they don’t really give much insight into what your needs are as a client, they don’t talk to your desired lifestyle or current lifestyle. It’s really an archaic analysis used to box you into a category and dictate the return you can expect. This was my OLD world.
In my NEW world, we look at you from a lifestyle perspective, how you are currently living your life, and how you want to live your life. What is important to you, and what is negotiable? We need to determine your lifestyle and money behaviors, this combined with your current savings/ ability to save dictates the return you need, which in turn dictates the asset allocation you need and finally this asset allocation dictates the risk you need to take in order to enable to you live the lifestyle we spoke about initially and if you aren’t happy with the level risk you need to take, then we need to adjust your lifestyle expectations. This in its simplest form is LIFESTYLE FINANCIAL PLANNING.
As a lifestyle financial planner, it’s more about the journey to your financial freedom, as opposed to a one-off sale of a financial product sold on the premise of achieving financial freedom. I am here to help you get to where you want to go by giving you a clear picture of where it is you currently are and then walking the path we both agree is best suited to get there.
ARE YOU READY TO TAKE THE FIRST STEPS?