Investment planning addressed in industry white paper

Posted on October 20, 2021

Prof Henco van Schalkwyk and Jacomien Visagie of UP’s Department of Financial Management were invited members of the joint industry workgroup that tackled the important issue of risk profiling from a professional investment planning and advice point of view. The workgoup published a industry white paper providing a sound investment planning framework for financial planners and advisers.
Prof Van Schalkwyk explains that the suitability of investment advice and poor client outcomes have been primary concerns of all the major industry bodies in South Africa for many years.
“Considering risk and establishing a client’s risk profile is an integral part of creating an investment planning and advice framework aimed at rendering sound and suitable investment advice to clients. The General Code of Conduct of the Financial Advisory and Intermediary Services (FAIS) Act determines that a client’s risk profile need to be determined in order for advice to be suitable. The Act does, however, not define or expand on what is meant by a risk profile,” he adds.
The Financial Planning Institute of Southern Africa NPC (FPI) and the Financial Intermediaries Association of Southern Africa (FIA) recognised the importance of providing an industry framework for professional financial planners and investment advisers when determining the risk profiles of clients. They subsequently established a joint industry work group to debate the key issues pertaining to risk profiling.
To give credibility to the workgroup, it was important to ensure participation by a diverse group of industry stakeholders and therefore the workgroup comprised of a combination of relevant industry body representatives, industry role players, academics, experts in behavioural finance and selected top financial planning practitioners.
Prof Van Schalkwyk notes that the paper is not aimed at providing the industry with a compliance solution, but rather at providing a sound investment planning framework with a specific focus on investment risk and how it relates to the risk profile of investors. “The framework seeks to provide for sound and consistent application in the investment planning and advice process that will enhance the suitability of advice to investors (clients) and limit ‘noise’ or judgement errors.”
Financial risk profiling refers to the process of determining the amount of financial risk an individual would be willing and able to be exposed to in order to reach a specific investment goal. It incorporates at least three components: risk required, which is the risk that an individual needs to take to reach the goal; risk capacity, which is the financial ability of an individual to withstand a decrease in investment value or income stream; and risk tolerance, which refers to the willingness of an individual to be exposed to risk.
The white paper was written specifically for financial planners and advisers, but the ultimate benefactors would be their clients who will receive more suitable investment advice, says Van Schalkwyk.
“When making retirement savings and investment decisions, there is a myriad of factors to consider and products to choose from. Individuals often rely on the advice of financial advisors to help them make these important retirement and investment decisions and it is therefore vital that the advice offered by financial advisors is suitable to the needs of the client,” he notes.
He adds that more suitable investment advice will not only have a positive impact on the overall financial position of individuals, but also on their retirement savings.
“This is especially relevant from a South African perspective, as numerous studies show that only a small percentage of South Africans will be able to retire comfortably. They then become dependent on social security, which puts a burden on the state and all taxpayers. Society at large will thus benefit from this study where clients will receive more suitable investment advice which would help them achieve their investment goals and improve their chances of retiring comfortably.”
- Author Petronel Fourie

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