ASIC expects AFS licensees to document client risk tolerance assessments with clear evidence of the client’s capacity and willingness to take risk, including how the assessment was conducted, validated, and applied to the advice. The documentation must show a logical link between the client’s risk profile and the recommended strategy.
Expanded Answer
ASIC expects risk tolerance to be assessed using both quantitative tools and qualitative judgment, not solely relying on a questionnaire outcome. Documentation must capture the client’s financial capacity for loss, investment timeframe, objectives, and behavioural attitudes to risk. The assessment should demonstrate that the adviser has considered whether the client can afford to take a risk, not just whether the client is comfortable with it.
In practice, advisers should retain completed risk profiling tools, supporting file notes, and evidence of client discussions on risk, volatility, and potential outcomes. Any inconsistencies, such as a high-risk profile with low capacity for loss, must be explained and resolved in the file. The final risk rating should be clearly justified and consistently reflected in the recommended asset allocation and strategy.
Regulatory scrutiny increases where risk profiling is treated as a tick-box exercise or where recommendations do not align with the documented risk profile. ASIC and AFCA assess whether the adviser exercised judgment and whether the risk profile genuinely informed the advice. Poorly evidenced or contradictory risk assessments are a common source of inappropriate advice findings, as outlined in the risks of risk profiling and understanding client suitability: beyond Standard 5.
Why it matters
Weak or inconsistent risk profiling undermines the appropriateness of advice and increases the likelihood of client loss and complaints. Regulators focus on whether risk was properly understood and applied, not just recorded.
Practical guidance
Document both risk tolerance and capacity for loss, including how each was assessed and reconciled
Record client discussions about risk, including explanations of volatility, downside scenarios, and trade-offs
Ensure the final risk profile is clearly linked to the recommended strategy and asset allocation
Further reading
The risks of risk profiling
Understanding client suitability: beyond Standard 5