Abstract
The legislative requirement for a Financial Planner to establish an Investor’s Risk Profile during the portfolio recommendation process has been debated for a while, as there is a lack of guidelines and prescription for the establishment thereof. Until now, no study has been able to collect and evaluate South African risk assessment tools. Neither has any study established a framework as a guideline for what should be included in a risk assessment tool in view of industry practices. This has resulted in scanty academic literature on the South African regulatory requirements.
This study aimed to establish a framework for risk assessment and to evaluate the suitability of risk assessment tools in the South African CIS environment. It deployed the qualitative documentary research method to meet the objectives of the study. The framework was established for the evaluation of the risk assessment tools for suitability. The study employed thematic analysis techniques for data analysis.
The study collected 12 risk assessment tools for evaluation. It established that 10 of the risk assessment tools used by FP were in questionnaire format, and 2 were asset allocation calculator tools. The study further revealed that 75% of the risk assessment tools were compliant with the established framework which states that a risk assessment tool should be comprehensive in nature. 38% of the risk assessment tools were compliant with the established framework as they had representation of demographic factors within the risk assessment tools. 85% were compliant with the established framework since they had representation of regulatory factors. 90% were compliant with the established framework that requires risk categorization within the risk assessment tools.
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Through analysis, this study discovered that there were some risk assessment tools that did not have representation of questions relating to the important elements identified in the established framework, as a result, the suitability of those risk assessment tools was not confirmed. None of the risk assessment tools captured all the elements of the framework.
Keywords: Risk Assessment, Portfolio Recommendation, Risk Assessment Tool, Risk Profile, Risk Profile Questionnaire.