Appropriate classification of the investor’s profile can avoid problems and losses – 09/19/2021 – Marcia Dessen

Facts: Most investors do not have sufficient knowledge about investment products and trust the advice they receive from advisors; despite the fragile approach that the customer is the center of attention, the financial industry is driven by the sale of products.

Consequence: Inappropriate recommendation and purchase of products.

Bold multimarket funds, for example, may be suitable for a young investor, at the stage of building wealth, with a long time horizon, with high tolerance and the ability to take risks.

However, it makes no sense that these funds account for 70% of the portfolio of an 82-year-old retired investor who wants to preserve his assets and whose income is needed to supplement his family income.

When asked about the risk profile with which he identifies, he presents himself as conservative. And it couldn’t be different, based on the brief description presented.

It surprises me to see that the misallocation of assets is repeated in the three investment portfolios it maintains with three different financial institutions.

I researched the risk profile rating assigned to the investor and found the cause of the misunderstandings. One of the institutions classifies him as bold. The other two do not know their client, the registration is out of date.

We can learn a lot from this example, which, unfortunately, is not fictitious.

Investors need to ensure that the risk profile assigned to them is correct and reflects their willingness to take risk and their ability to deal with any losses arising from riskier investments.

How do we do it? Responding to the questionnaire applied by the financial institution in a conscious and responsible manner, aware that the classification will be used by the advisors to base the offer of products. An inadequate classification supports the offer of an inappropriate product and, to some extent, reduces the consultant’s liability.

The learning for the advisors is to know the client better, in addition to the profile attributed to him, to ensure that the classification is correct and that the recommendation of products he will make is adequate.

Financial institutions and their representatives, especially those that keep their customer records out of date, are warned that they are not complying with Instruction 539 of the Brazilian Securities Commission. I transcribe an excerpt of the instruction to disclose the responsibility of intermediaries:

“People qualified to act as members of the distribution system and securities advisors cannot recommend products, carry out transactions or provide services without verifying their suitability for the client’s profile.

Intermediaries are prohibited from recommending products or services to the customer when:

I – the customer profile is not suitable for the product or service;

II – the information that allows the identification of the customer’s profile is not obtained; or

III – the information related to the client’s profile is not updated”.

Know yourself, respect and impose respect on your investor profile. Check your current risk profile at the financial institutions with which you have a business relationship. Redo the procedure if you consider that the assigned profile does not correspond to reality. Respecting the risk tolerance level and investment objectives, many problems and losses can be avoided.​

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