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Adviser Workshop: How to determine a client’s risk profile

Adviser Workshop: How to determine a client’s risk profile

Andrew Moore, Pete Matthew and Colin Low discuss their methods for assessing a client's attitude to risk.

Andrew Moore

Director, Goodmans Financial Planning

We use the risk profiling system FinaMetrica to get the tolerance to risk but that is just one part of the process. We mainly deal with people in retirement and living with drawdown plans, so we need to know how they will react when the markets go down.

Be thorough

We are pleased with the job FinaMetrica does and it seems to be accurate for discovering clients’ innate tolerance for financial risk.

We do not take that as a definite in terms of how much risk is in the portfolio because that comes down to things such as how much need for return the client has. To work that out we do a lot of cashflow modelling with the client.

Eliminate bias

Advisers should understand the risk tolerance questionnaire is about 20% of the risk picture. The real risk has to be surfaced using cashflow modelling or some kind of decision-making engine, such as a cashflow tool.

We do not base risk on the adviser’s own opinion of the client because this will often show more of the adviser’s risk tolerance than the client’s. The adviser will see in the person what they want to see, so if we have a hyper-cautious adviser they will always see caution in the client. It is a bias we strip out by sticking to our process.

Pete Matthew

Managing director, Jacksons Wealth Management

We use questions from software supplier Intelliflo, which are primarily based on investment risk, but we are considering alternatives.

Get the full story

There should be some kind of measure for capacity for loss and there needs to be some way to get insights into client behaviour. I always say the client’s answers to the questions are half the story.

The adviser’s job is to pick up on verbal queries and teach clients about investment risk. It should never be the case that just because the questionnaire says a client is balanced, you present them with a balanced portfolio. There is so much more to it than that.

Steady the ship

The current tools are two-dimensional when it comes to dealing with three-dimensional humans. But I am excited about one that is being built by Be-IQ, a risk assessor that draws upon work from academics and experts, and uses techniques rooted in Nobel Prize-winning theory. It takes into account behavioural economics and why people make the decisions they do.

It is a large part of the adviser’s job to keep an investor in their seat when things get rocky. But we need all the help we can get in terms of determining when a client might get unsettled.

Colin Low

Managing director, Kingsfleet Wealth

Around five years ago we built our own tool. We did not want to use one from a provider because we thought it would create a conflict of interest. We ended up constructing a fairly straightforward, seven question, risk profiling questionnaire.

We only use it face-to-face, which over time has helped us appreciate risk profiling is more of an art than a science. Just having a number is not getting to know the client. The Financial Conduct Authority is starting to come round to this idea.

Assess body language

What I am noticing by conducting risk profiling in this way is people who are prepared to take on more risk go through the form quicker, whereas those who have a lower propensity for risk take their time reading every question and are often querying one answer against the other. These are things you would miss by supplying the questionnaire remotely.

Some of the ways in which clients respond can help us to understand their attitude to risk better than the answer they put down. That caution about the perception and their understanding often feeds through into caution in how their investments will perform.

It is important advisers take their time with risk profiling. Hard facts tend not to take too long to gather, but risk profiling is a key soft fact so it cannot be done quickly. It needs to be a conversation piece.

THREE TOP TIPS

  • Andrew Moore: Risk profiling must be done in conjunction with cashflow modelling.
  • Pete Matthew: Good advisers should teach clients about investment risk, not just get them to complete questionnaires.
  • Colin Low: Do risk profiling face-to-face to get a sense of how clients react to the questions.

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