Should psychometric testing be the benchmark for client risk?

He would say that.....

Whilst I can see a vested interest here, I agree that the FSA should be very clear about what they expect and setting a standard would help to build consumer confidence, assuming that the consumer has confidence in the FSA.

I am not disposed to agree with Mr Resnik nor, I suspect, is the FSA.

Attitude to investment risk is properly raised in an adviser/client conversation, a process of discovery for both parties culminating in both parties understanding the client's appetite for risk. The adviser uses skill and judgement based upon education, training and experience to conduct the client through the process, not a psychometric test. This is called Treating Customers Fairly.

Furthermore, the FSA delivery system for financial services regulation is principles based, not prescriptive, and is focused on desirable outcomes for clients rather than slick procedures for advisers.

I for one would find it objectionable if I was compelled to buy Mr Resnik's product.

and education eh! Stephen, psycho babble!

It sounds like a case of 'physics envy' for the poor chap.

Measuring attitude to risk is more art than science. I don't think it's comparable to testing blood pressure - well not the way they do it at my doctor's office anyway!

@ Jack - the trouble is with art these days, a lot of it is crap!!

And what happens in 10 years time when everybody wakes up to the fact that it's all crap and blames you for not using science,...

Stephen, I couldn't agree more. The results of psychometric testing can be different/change, according to a clients frame of mind at the time, whether or not they've been drinking alcohol and a number of other factors and influences. Come RDR justifying remuneration will become more difficult, therefore, demonstrating to the client you have the skill, experience and judgement to assist in ascertaining their attitude to risk instead of relying upon tools will be invaluable. That is not to say that a risk profiler shouldn't be used, it can be a helpful prop, but in my view shouldn't be used alone.

I took a psychometric test when I joined Allied Dunbar in 1986 and the resultant comment was , this man may not suit a career in financial services

Record - 4 yrs with AD and 21 as an IFA - these tests are a lot of hot air on paper.

I agree with GNewman, we use due skill, care and diligence, not some airy fairy psycho test.

This is one of the best pieces of marketing for the modern world I have seen in a long time; we should all learn from it.

The lessons here:

1. Send a press release to a website

2. Say something mildly controversial, and invite people to comment, keeping the website and their advertisers happy.

3. Present something unproven (psychometric testing) as fact/science

4. Make a spurious claim about big organisations being interested

5. Say that those who are buying the product/are interested in it have their clients best interests at heart (though it seems they didnt just a few months ago).

Well done, on a modern classic (but maybe a bit too obvious) marketing piece.

Good grief - these are clients wanting investment advice, not job applicants.........

And, as it's Friday, I'll set out an alternative risk assessment strategy which I've found very useful over the years:

Adventurous: Leo, Aries, Sagittarius.

Cautious: Cancer, Capricorn

Try Anything Once: Gemini, Aquarius

Will buy if the volatility can be shown to three decimal places: Virgo

Timed out for indecision: Libra

Will only invest in chocolate: Taurus

Not prepared to discuss their risk profile: Scorpio

Doesn't understand the question: Pisces

All consultants should be trained therapists in Reiki Head Massage techniques so they can put a client at ease when conducting the psychometric tests otherwise the results of the test may be skewed!

Maybe I have read or misinterpreted what Paul Resnik was saying. To me, I interpreted that he was saying the basis of any risk profiling system should be psychometric.

He is right to say the FSA should produce guidance notes so that companies can either bring new systems, or enhance their current system.

This will enable clients /advisers to increase a better understanding of risk profiling whatever system is chossen,

I have to declare an interest one of the early user and have been using FinaMetrica profiling system and have found that it produces consistent results year on year with my clients even through the current market turmoil when many client felt their risk profile would have changed.

I too think that most of these risk profiling tools are of questionable value. There will always be clients who:-

1. want Emerging Market returns with zero risk or those who are

2. 100% risk averse and won't go near anything other than cash and those who

3. accept that in the real world better returns than cash (structured products aside) can be obtained only if they're prepared to accept periodic and sometimes severe falls in the face value/s of their investments.

Traditional thinking about asset allocation was more or less upended in 2008, as many corporate bond funds suffered falls that hitherto had been expected only of equity funds. The important thing, though, is what those funds did the following year and, even more importantly, what they achieved over five years and longer. Yes, I know that's using the past to forecast the future, but none of us has a crystal ball and the world is an ever-changing place, not least economically. There now exists the view in a number of respected quarters that many of the Far East and Emerging economies are actually potentially less volatile than many established western markets. Those economies didn't suffer near economic meltdown in 2008, did they? So what if China's economy wobbles a bit? It's unlikely to be anything like as big the wobbles suffered by western markets, is it?

It's about managing client expectations, showing prospective investors what volatility actually means in percentage terms, the wisdom of diversification and telling them not to look upon investments (as opposed to cash savings) as a sure-fire get rich quick strategy without some possibly alarming downs as well as ups along the way.

That's my thinking on the subject anyway. Please feel free to disagree.

The outcome of a psychometric test is not set in stone but only ever to be used as an indicator. Moreover,who determines the standard you mentioned in your article?

Work out my risk profile then

I bet on the horses minium £50

Have AIM shares

A balanced ISA portfolio

Adventuours Pension Fund

Saving for a holiday next year building society account

Saving for my next car 3 years time Building Society account

Repayment mortgage

Money in fixed term cash ISA for 4 years special holiday

We do some psychological testing of clients risk tolerance by getting them to play chicken on the M1 - never fails.

According to the psychometric tests that Allied Crowbar used to do, Peter Sutcliffe, the Yorkshire Ripper, would have made a great life insurance salesman! He exhibited all the alpha and other qualities they were looking for.

Maybe they are still kicking themselves for not being able to recruit him, but if he does get let out, I'm sure the FSA will find a role for him.

Your schizophrenic and therefore you have covered all risk profiles. Unfortunately, it sounds as if your net worth is also below the threshold for even free advice and therefore your request for risk profiling would probably fall on deaf ears.

Phychometric testing, in isolation or as the prime driver, is no more a valid "science" than Scientology , both believed in absolutely by their followers but quite obviously flawed when looked at logically from the outside. Some might even think that amongst the people they attract are those who need a crutch to lean on to get through life - possibly lacking self belief but want to have something different to shout about and "believe in".

Now thats quite controversial, it was meant to be as I believe that IFAs should be more than a slave to ANY "system" or set of wooly questions put together by someone who "knows better". It seems that the FSA would agree given their critisism of the vague terminolgy used in many of the risk profilers promoted by various life/investment cos etc over recent years.

In fact I do believe strongly that soft non financial questions can be a great help in understanding a clients general attitude to life (which will reflect in their eventual reaction to a market fall) but the idea that questions such as "have you ever regretted a financial decision", "what side of the bed do you get out of" etc will give a meaningful understanding (to the client as well as the adviser) of what risk really means is fancifull, and it will most definately not identify what mix of assets will be most suited to a client. Perhaps a question asking how a clinet would feel if the "active" part of his investment portfolio fell by 30% in a few months, whether the feeling would be any different if his entire portfolio had only fallen by 10% etc etc, plus discussions around the subject, might be a little more revealing about clients understanding (i.e. is he educated enough about risk to invest in.....?) and his "attitude to loss" which the FSA have finally realised is what really matters to indivudual clients and what shoulkd drive IFAs advice.

The following question (or variation thereof) seems to appear in many of these profilers,"Is your attude to risk lower or higher, or the same as most people". How on earth are people to know the answer to that one? Have they had sufficient in depth discussions with a large number of people to actually know where they sit when compared to other? Even if they had, how people "perceive" themselves often has no correlation with reality. Just talk to people about skiing and the "risky" things they do. Many will consider their antics (jumps which are little more than hops, extreme which is actually just off piste alongside the piste) high risk and would consider themselves to be risk takers, definately "higher risk than average". Reality - yes they are very very slightly higher risk than most but if they were taken on a true high risk extreme run they would recognise what risk really is very quickly and discover that they were not such big risk takers after all and panic. Hey, isnt that what happened in 1987, 2000 and 2008 !!

(PS No duos in black suits carrying breifcases and bibles need bother calling to "enlighten me" )

Excellent! Best laugh I've had all day.

Having come to this industry from another (in which I was trained in psychometric testing and am therefore fully aware of the pros, cons and extent of the reliability of the tests) this article made me scoff at the typical fluff coming form one person or another trying to inflict a one-size-fits-all solution on a complex and dynamic industry. What people say in contrived tests can be misleading / misinterpreted. To do this correctly advisers would have to be properly trained... and I think they are a bit busy with other training right now to stay RDR compliant.

However, the comments afterwards have turned me from being vaguely irritated by Paul Resnik's suggestion to exceedingly amused.

Big thanks to Jonathon Clarke and Alan Hughes in particular who reminded me of my sense of humour and literally had me laughing out loud in the office... I wish I worked with you guys.

I hope the FSA realise the suggestion should have been announced on April 1st and move on.

Any of those making commentary above actually used FinaMetica or anything like it? Clients understand it, and want to make sure they understand investment risk - its a tool, not the be all and end all!

Mix in a real example of what happened to a portfolio with 'their atttiutde to risk' during the period from January 1973 to December 1975 (any 'Bear Bull' market can work) makes an interesting point.

Investment risk is not just willingness to accept volatility, but capacity for loss - FinaMetrica & Voyant tie up work wonders to explain this.

We used to use psychometric tests for job applicants back in the 70's and although sometimes they were good, the big drawback was that people tried to guess what answer we wanted to hear.

Having used some of the questionnaires from the likes of Standard Life, I find they are far better for opening up conversation than getting subconscious answers and use them as such.

The main snag is that if you use them for people with no investment experience they just don't work.

A pyschometric test - even if repeated several times to find the "average" result - will only tell an advisor what the *preference* of their client is. It tells you nothing of the client's ability to learn to adapt to a risk exposure that is more beneficial for them.

For example, a client may have a personality that prefers very high risks. This may not be the best investment strategy for them so they would need to learn to be more cautious.

Likewise, a personality that prefers caution can learn to adopt an investment strategy that is more risky and more beneficial.

In these situations, it is down to the advisor to understand the preference of the client *relative to* the risk of their portfolio and to help the client to manage their emotions accordingly.

That is *not* to say that everyone should have the same risk profile in their portfolio but clients should not be matching 100% their portfolio risk with their psychological preference for risk.

Friday afternoon again ....... and the day has been filled with dissitations and multiple theories as result of a Citywire article. Think MP sums it up well....(reading between the lines) 'give em a couple of double whisky's and persuade them to do what the adviser decides!!' Have a good weekend!

Not sure this gets to it. I'm of the view that risk tolerance and attitude are two different animals. The first measures the client's ability to absorb the negative aspects of risk while the second measures intrinsic appetite for risk. The two can be, and often are completely different, in th esame client. That is, in my view, what the FSA are on about.

So all the FInametrica posturing in the world will not square that circle!

The problem with it all is that at point of claim you need to prove it all. Having had a claim against me and upheld by FOS, I would gladly welcome a system that was bullet proof.

FOS review of the case - client was mainly in cash prior to claim. Yes he would be he was retiring. Assessed as cautious to medium risk by FOS. Medium risk investment used together with others making in our estimation portfolio fit of cautious to medium risk; case found against us. Only option open to us judicial review. Cost exorbitant, claim settled.

I think that the current system is flawed but I don't want psycho testing unless we can use a lie detector on some one when they stick a claim on you.

I agree with you Mark, I was referring to psychometrics informing us about attitude or preference. There is of course, as you say, the client's financial capacity to tolerate the negative aspects of risk. The latter is perhaps more obvious to judge if the advisor has complete information about their client's circumstances.

So we have three things to worry about:

1. The client's preference or attitude towards risk (which may be "unwise" anyway)

2. The client's tolerance for or financial capacity to cope the negative consequences of risk

3. The risk of the portfolio that is most appropriate to them given their financial objectives, lifestage etc and the answer to point 2.

1 does not equal 3.

So relying on a whizzy psychometric tool to judge what risk profile the porfolio should have is a big mistake for the client. Sometimes they need to be encourage to accept more risk. Sometimes they need to be discouraged from taking so much risk.

Bob: What was the claim you experienced, that you exposed client to too much risk or too little risk? Not quite clear to me from your comment.

Even if you had had a pschometric assessment of your client, chances are the client would have denied it was "up to date" as they generally don't understand risk, investment or pyschometrics!

MP - that's it - those 3 points perfectly encapsulate it!

What about passing the risk in point 3 to a fund manager (eg DFM)?

Mark: That opens up an entirely separate debate about who is best placed to "fund manage" ;-) which I suspect lies outside of this particular discussion thread on the use of psychometrics.

At the moment, we have various layers of "fund managers", all taking views on asset allocation, risk, investment style etc.

For example, we have the consistently top quartile investment managers of global remit, multi-asset funds holding somewhat different views about where best to allocate assets.

Then we have financial advisors telling their clients that the best way to allocate their assets is in some way across these top-quartile manager, plus a bunch of other investments and asset classes that the financial advisor takes a fancy too.

Then we have the client who says things like - I don't like Japan, I want more property, technology or whatever.

Result - no clear line between initial investment and eventual asset allocation and therefore risk.