Risk profile tests - Is there a gap between stated and actual risk appetite?

CLAIMS to sustainability have become commonplace in Singapore's fund management, distribution and advisory landscape. But a recent piece of research raises some intriguing questions, with wider implications beyond sustainable funds.

Capital Preferences, a firm specialising in profiling tools to help advisers better understand and guide their clients, has found in recent research that there is a significant gap between intention and action in the growing sustainable investment market. It found that 3 out of 4 investors were not confident that their current portfolios were aligned to their environmental, social and governance (ESG) values.

While the study is interesting in itself, it raises a wider and arguably more serious question: Does a similar gap exist between clients' stated risk profiles and the portfolios or investments they are put into? A risk profile assessment is routinely in the form of a set of 3 to 4 questions. It is administered at the outset prior to any investment, and its format has hardly changed over the past decade or 2.