Investment Profiling is one of the most critical steps in a relationship and has progressively emerged as a compliance issue. As a pre-requisite to any investment decision, this process must be formalised and systematically performed, not only at client opening but also on an on-going basis to take into consideration changing needs and risk perception as well as changes in asset allocation and model portfolios.
Investment Profiling is a privileged moment in the relationship with a client. Relationship Managers have a unique opportunity to sensitize their clients to the potential risks and rewards of a portfolio and to make sure that a common understanding is reached. Using software, or based on a report, these sometime confusing concepts can be demystified and mastered.
Investment Profiling consists primarily in understanding a client’s risk tolerance in relation to his or her current financial situation and future financial needs, and proposing the most appropriate risk profile and related investment strategy. The client risk profile reflects both the level of risk capacity and return expectations agreed with the client.
Used on an on-going basis, Investment Profiling can also be used to provide consistent proactive advice. As a result, Investment Profiling is instrumental in generating transactions backed by a structured, traceable and controllable advice rationale.
A more systematic Investment Profiling process is best implemented with the use of IT. The traditional paperbased approach is now considered as inadequate and not cost efficient.
The Investment profiling business component efficiently supports relationship managers in systematically performing the investment profiling process.
Using the investment profiling wizard, the relationship manager is guided through a number of pre-defined steps. These steps can be customised to the specific requirements of each financial institution. The risk profiling questionnaire and the algorithm used to determine the most appropriate investment strategy are totally configurable.
Defining the investment profile >>>
Clients are first requested to answer a questionnaire aimed at analysing their risk aversion, quantify the assets that can be invested, and define financial goals. The answers to the questionnaire determine the risk capacity of the client and indicate a risk profile. If necessary, clients are requested to specify their main investment constraints (holding, allocation or trading constraints).
The information collected is processed to suggest a risk profile and combines with the client constraints to propose a relevant investment strategy. The bank manages Investment strategies centrally with its portfolio modeling tools. The relevant investment strategy can be clearly presented by the relationship manager to the client. The module also optionally simulates the expected return and risk measures of different alternative investment strategies (backtesting), so that the client can appreciate and ascertain the trade-off between risk and expected return in practical terms. With this information the client decides which investment strategy will be implemented, and the output of the process is stored in a database for documentation purposes.
Generating a structured investment proposal >>>
Investment Profiling does not limit itself to understanding the client and agreeing on a trade-off between risk and expected return. The module can also involve the automatic generation of a structured investment proposal to invest a cash amount or rebalance an investment portfolio. The structured investment proposal describes the portfolio before rebalancing, the list of proposed orders, and the portfolio after rebalancing. The full proposal is also stored for documentation purpose.
Generating an investment profiling report >>>
Finally, Relationship Managers can print an Investment Profiling report that can be handed or sent to the client. The report presents all the steps of the Investment Profiling process. It includes the answers to the questionnaire, the initial risk profile and investment strategy proposed, the risk profile and investment strategy finally selected by the client and the structured investment proposal.
Monitoring client portfolio against agreed investment profile >>>
Investment Profiling is a dynamic process. A client portfolio must constantly be monitored against the agreed investment profile and action must be taken if significant differences are revealed. Relationship managers must also be able to track any change in client needs and risk aversion and anticipate the impact on the Risk Profile and the Investment strategy. Any significant changes must therefore lead to a full reassessment of the Investment Profile. Advisor Client & Portfolio monitoring module allows Relationship Managers to entirely delegate the heavy work of monitoring clients and portfolios to an ‘alert engine’. For instance, a Relationship Manager may create an alert that is triggered if any of his portfolios is overweighted by more than 5% in US stocks compared to the target asset allocation.