Ombud questions use of risk profiles
A prudent and diligent financial adviser will not slavishly rely on the results of a risk profile questionnaire to determine your tolerance of investment risk, the financial advice ombud said in a recent determination.
In a ruling against adviser Raj Chutterpaul, of Raj Chutterpaul Brokers, Noluntu Bam, the Ombud for Financial Services Providers, said your adviser must, by asking relevant and appropriate questions, take into account your personal profile and your circumstances.
In the ruling handed down earlier this year, Bam ordered Chutterpaul to repay Vinesh Mohanlal of Pietermaritzburg the R400 000 he invested on Chutterpaul’s advice in an unlisted company, which has since been liquidated, and the troubled Sharemax property syndications.
The results of risk profile questionnaires are merely one factor that should be taken into account, and they were never meant to be conclusive proof or evidence of your actual tolerance of risk, she says.
Wessel Oosthuizen, the director of the Centre for Financial Planning Law at the University of the Free State, told a recent Financial Planning Institute workshop that advisers should use risk profile questionnaires as a guide, rather than as the answer, when it comes to assessing your risk tolerance.
Oosthuizen pointed out that the ombud said in the Chutterpaul ruling that the questionnaires do not necessarily produce an accurate assessment of your risk tolerance.
Bam also said that risk profile questionnaires sometimes ask about the chances you would be willing to take. Many people are unable to relate this to investing, where losing their capital can have serious consequences.
In another case that came before the ombud this year, John Moore and Johnsure Investments CC were ordered to repay G Black the R100 000 he had invested in the Blue Zone property syndication.
In this case, Bam found that Moore had asked Black to complete a risk profile questionnaire, but he had merely gone through the motions of conducting a risk analysis.
Oosthuizen says Bam found that the risks of the syndication that Moore recommended did not match Black’s investment mandate, circumstances or even the results of the risk profile questionnaire, which indicated that Moore was a moderately conservative investor.