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Wealth managers turn to psychology to measure risk appetites

Priya Sheth Mumbai | Updated on March 12, 2018 Published on August 18, 2011


Wealth managers have developed unique risk-profiling methods to help them design individual investment portfolios. With the uncertainty in the Indian markets, risk profiling is proving challenging for wealth managers.

They now group investors into five broad categories — secured, conservative, moderate, growth and aggressive. “Testing the risk appetite of an individual is of utmost importance. Before making the investment plan, wealth managers need to judge the investor's ability to take risks as well as his return expectations,” said Mr Ashish Khetan, Head, Family Office, Kotak Wealth Management.

Many wealth managers have fixed investment templates for each investor category. Others, however, prefer a different approach. “Every investor is unique and fixed investment templates cannot be applied to everyone. The psychology of an investor should be kept in mind while creating the investment plan. I use a discussion-cum-psychology method of risk profiling,” said Mr Piyush Sheth, Certified Financial Planner, Plan Invest Advisors.

Objective-type psychometric tests are used to gauge the psychology of the investor. “We have developed a risk metric which the client has to fill. The questions in the test paint different scenarios and the client has to choose what he/she would do in that situation,” said Mr Khetan. The test is so designed that it places clients in extreme situations, which help reveal their personality.

Discussion-oriented approaches are also important in formulating investor profiles. And, finally, after all the tests and analysis, if the client remains uncomfortable about the investment plan he can veto it.

Roughly 65-70 per cent of investors are assigned the conservative-to-moderate profile, say wealth managers. For the high-risk investors, some wealth managers have devised the ‘safety pot', which ensures some investment into fixed deposits they can fall back on in case they make losses on equities.

Reviewing investor profiles is also an important task for wealth managers. “We do a quarterly review of our client profiles and monthly review of larger client profiles. The weakness in the system is that people invest but don't review profiles regularly,” said Mr Pradeep Dokania, MD and Chairman, Merrill Lynch Wealth Management.

Published on August 18, 2011
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