“I think historically and this is something we see as fundamentally wrong [too] with the whole process of risk profiling people is that a typical portfolio is assumed to be a static or a constant allocation,” Omniwealth senior financial planner Andrew Zbik told ifa.
“I think throughout the entire GFC [Great Financial Crisis] most peoples’ textbook definition of a balanced portfolio did not change,” he added.
In light of this Omniwealth internally have a created “for every asset class both a risk on and risk off asset allocation” that changes the balance of clients’ portfolios.
“A classic example is a conservative client in a ‘risk on’ environment will want to have about forty per cent of their assets between Australian equities and International equities, whereas in the risk off allocation that will half to say twenty [per cent],” Mr Zbik explains.
Omniwealth believes this gives planners the ability to have a “dynamic play between the two risk portfolios”.
However, he said this approach has not been widely adopted.
“Most of the industry still has it very static. Regardless of what is happening in the environment they still stick to the same asset allocations for clients,” Mr Zbik stated.
Market timing advocates need get out of the risk profile discussion, they are unrelated. Use of traditional risk profiling and pidgeon holing is an issue, but the answer sure as sure isn’t to adopt ‘risk on/risk off’ time the markets, that’s idiotic.
rISK PROFILES ARE JUST ANOTHER WASTED PIECE OF PAPER THAT asic REQUIRE. 5-10 QUESTIONS IS NO GAUGE ON RISK… ESPECIALLY WHEN MOST rp’S ONLY RELATE TO SHARE / MARKET INVESTMENTS.
Needs to be objectives based…..I.e. is the focus on income or growth or both, time frames etc. I think we have too much focus on risk profiling and trying to stick to benchmarks that we loose focus on the overall strategy. Ever wonder why we have “balanced” risk profiles and “balanced” managed funds…..and there is your answer.
If client needs a return of say 6% p.a. average to meet their objectives, then we should be building a portfolio that could help achieve that…..not letting a risk profile document determine the product. Then there is greed, which is another story….
Yes, the risk profiling process, and subsequent pigeon holing into a risk profile asset allocation (conservative, balanced, growth etc) is very flawed. However, trying to time the markets by imagining one will consistently know when to ‘risk-on’ and ‘risk-off’ is even more flawed (in my humble opinion).