Risk profiling ‘astrology’ fails clients
Advisers need to ask their clients more than just half a dozen questions to work out their ideal asset allocation, according to FinaMetrica co-founder Paul Resnik.
Monday, July 9th 2012, 6:00AM
FinaMetrica licenses a 25-question questionnaire used by more than 3000 advisers in seven countries to analyse their clients’ risk tolerance.
And Resnik, who will be speaking at next week’s Institute of Financial Advisers conference, told Good Returns that much of what passes for risk profiling is of no more use to clients than “astrology” when it comes to working out what their investment portfolios should look like.
The test, which takes about 20 minutes for clients to complete, allows them to see how much risk they are willing to tolerate relative to the rest of the population; instructions are provided for advisers recommending how they should explain the results.
Resnik said the first reaction by most advisers to the test, which is “quite unlike anything they have seen before”, is to comment on how long it is.
However, he said the renewal rate of 85% suggested there was plenty of use in it once advisers got over their initial shock.
“Advisers benefit because they’re not spending all their time trying to deal with unhappy clients,” he said. “Fund managers benefit because they’re not spending all their time with churned portfolios.”
Resnik said the questionnaire dealt with risk profiling only; risk capacity (how much risk clients can afford to take) and risk required (how much risk clients need to take to reach their financial goals) were up to advisers to work out themselves.
He said the ideology behind the test was one of “informed consent” on behalf of clients, cutting between the two extremes of “laissez faire” and “paternalism” on the part of advisers.
“It makes clients take responsibility for decision making and it ensures they’re not surprised by outcomes,” he said.
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