Page 100 - Profile's Unit Trusts & Collective Investments - March 2026

Chapter 6 Investment risk

Risk profiles and risk ratings
Both funds and investors have risk profiles. The risk profile of an investor tries to describe or
quantify the level of risk that the investor can absorb if things go wrong. The risk profile (or
risk rating) of a fund is usually based on the historical volatility of the fund and/or the assets
it holds. Risk profile terminology is often used interchangeably: both low risk investors and funds can
be referred to as “conservative”, for example. The meaning is consistent: the conservative investor is
risk-averse; the conservative fund offers a low risk vehicle. Similarly an aggressive investor is risk-prone
and an aggressive fund has a high risk/high return profile.
should become more heavily weighted in bonds and cash. Although these questionnaires are
useful, they do not generally go far enough.
Other issues that need to be considered are:
R Investors might also find it useful to ask not only what market risk they can tolerate,
but also what market risk they cannot tolerate (eg, identify savings you can’t afford to be selling
at a loss).
R Risk profile questionnaires, usually assume that all investment goals are long-term. However,
this is sometimes not the case. People have different goals during their lives with different
investment terms. This means that no one can have one savings plan based on the single
assumption of risk level. Investments have to be structured to meet various targets with
different risk assessments for each goal.
R The relative income of an investor should be considered. An investor with more disposable
income is able to take a higher risk.
R An investor with alternative liquid assets is able to take on a higher investment risk: in the case
of an emergency, it is unlikely that he or she would have to sell his or her investments.
R Some investors may be advised to perform this investment exercise in reverse. Instead of
starting with the question “What level of risk do I feel comfortable with?” the investor might
ask, “What level of risk is it necessary to achieve to meet a predetermined investment goal?”
Then it can be decided if that risk threshold can be tolerated.
These considerations make it clear that risk assessment goes beyond a simple questionnaire.
In designing investment strategies, the investor and financial adviser must work with four parameters:
financial circumstances, financial needs, risk capacity and risk appetite. The interaction between
these four often conflicting factors is surprisingly complex.
How much weight should be given to risk appetite is a matter of some debate. Some commentators
argue that financial needs and risk capacity are all important; others argue that understanding risk
appetite is vital.
The problem with ignoring risk appetite is that perceptions lead to actions. For example, a
risk-averse individual placed in a high-risk product (because it is appropriate to financial needs
and risk capacity) may, out of fear, offload underperforming investments at the worst possible
time. A certain composure in the face of volatility cannot be disregarded – it is a necessary
characteristic for investors who embrace the high end of the risk spectrum, whatever their “objective”
risk capacity.
For many years since the implementation of the FAIS Act, there have been debates about the
definitions of “risk,” “risk profile” and “risk profiling.”
For financial advisers, risk profiling is not optional – the General Code of Conduct (GCOC) requires
intermediaries to consider the suitability of a product by taking into account the client’s needs and
objectives, financial situation, risk profile and financial product knowledge and experience. It further
states that advisers must consider the client’s ability to financially bear any costs or risks associated
with the financial product and the extent to which the client has the necessary experience and
knowledge in order to understand the risks involved in the transaction.
The code goes on to state that advisers must conduct an analysis, for purposes of the advice,
based on the information obtained and identify the financial product or products that will be

98 Profile’s Unit Trusts & Collective Investments March 2026