Risk Profiling: The Industry’s Most Misunderstood (and Misused) Idea

This is one of my biggest soap box issues

For decades, financial advisers have relied on a tool called risk profiling - a questionnaire that supposedly reveals how much volatility, uncertainty, and potential loss a client can “tolerate.” On paper, it sounds perfectly reasonable. In practice? It’s one of the biggest misconceptions the financial advice industry has ever created.

And that’s saying something!

The Problem With Risk Profiling

Let’s start with the obvious:

I’ve never met a client – ever - who “enjoys” losing money.

Not once has someone come into my office excited to see their portfolio down 20%. Not once has a client said, “I really love the thrill of big losses; give me more of that.” Yet somehow, the industry claims that all clients have wildly different "risk profiles," as though some people are wired to happily watch their wealth erode.

The truth is simple:

Nobody likes losing money.

And your emotional response to loss is not meaningfully different from mine.

So why does the industry lean so heavily on risk profiling?

Because it helps advisers push clients further up the risk/return spectrum, then hide behind the paperwork when things go wrong.

The Hidden Agenda: Pushing Clients to Take More Risk

If markets rise, advisers get to point to your “aggressive” or “growth” profile and show off the great returns.

If markets fall, advisers pull out the same document and say:

“Well… you told us you were comfortable with risk.”

Risk profiling becomes a defence mechanism, not a client-protection tool.

And that’s the real issue.

It shifts accountability away from the adviser and onto the client, even though the client relied on the adviser in the first place to guide them safely.

What Clients Actually Want

In my experience, clients want three simple things:

1. A decent return.

2. Without risking the family farm.

3. And confidence the money will be there when they need it.

That’s it.

It’s not complicated.

And it certainly doesn’t require a 35-question psychological exam.

When you strip away the industry jargon, clients are hiring advisers for sound stewardship - not to turn their retirement into a science experiment.

The Real-World Return Expectations

These days, the official long-term return expectation for a sensibly managed portfolio is around 6–8%

over rolling five-year periods.

In reality?

Over the last five years, many diversified portfolios have delivered closer to 9–10%.

Those results weren’t achieved by taking crazy risks.

They were achieved by investing intelligently, managing behaviour, staying disciplined, and avoiding the temptation to "make or break."

A Better Philosophy: Do No Harm

My approach to financial advice is built on one principle:

Do no harm.

My job is not to gamble with someone’s life savings.

My job is not to chase the hottest trend or build a portfolio that looks aggressive on paper so that it outperforms some benchmark in the good years.

My job is to:

• Protect capital

• Grow it sensibly

• And deliver long-term outcomes people can rely on

Risk profiling gets in the way of that.

It creates a false sense of precision.

It gives advisers an excuse to take short-term risks for long-term problems.

So What Should Replace Risk Profiling?

Instead of asking clients whether they “feel comfortable” losing 30% - as though anyone ever does - we should be asking:

• What do you need your money to do?

• When will you need access to it?

• What return do we need to achieve your goals without exposing you to unnecessary risk?

• How do we build a plan that succeeds in both good markets and bad?

This is real financial advice.

It’s grounded in stewardship, not self-protection.

Final Thoughts

Risk profiling was meant to help clients, but in many cases it’s done the opposite. It has become a shield for advisers and a trap for investors. Clients deserve better than that. They deserve clarity, honesty, and strategies designed around real-world outcomes - not around a tick-the-box questionnaire.

And most of all, they deserve an adviser whose first priority is simple:

Don’t risk the family farm.