Investor Profiling (1/3)

As required by SFC, firms should ensure suitability when making investment recommendation or solicitation to their clients. A pre-requisite for suitability assessment is "investor profiling". That means, you understand the clients' investment objectives, investment experiences, financial situation, risk tolerance, etc. before you promote any product / service to them.

Typically firms are using a questionnaire to collect the above information and then classify the clients into different categories. For instance, if you are classified as a sophisticated investor, the salesmen can sell a high risk product to you. This profiling process can help reduce the so-called "mis-selling risk".

Such a system is good but not perfect, because it doesn't take into account one important factor: investor's behavioral pattern. Have you encountered some investors who keep asking questions but never making decisions? This is a behavioral pattern affecting both your sales performance and mis-selling risk.

How can salesmen understand clients' behavioral pattern better? There are some well-known models designed by psychologists. A very famous and useful one is called DISC Profile. In this series of blogs, I will explain how this model may be used to profile an investor.

DISC Profile sets out a standard questionnaire which has been done by millions of people and thus it can provide consistent results to predict one's behavioral pattern. This model classify people into 4 types and explain for their differences. Even without using the questionnaire, you can ascertain your type by asking yourself the following 2 questions:

1. I generally perceive the environment as (a) unfavorable or (b) favorable.
2. I generally believe I am (a) more powerful or (b) less powerful than the environment.

Then...

• If you choose (a) for both questions, your type is Dominance.
• If you choose 1(b) and 2(a), your type is Influence.
• If you choose (b) for both questions, your type is Steadiness.
• If you choose 1(a) and 2(b), your type is Conscientiousness.

I'll explain the salient features of each type in next blog.