I’ve taken psychometric tests a few times in my life – usually at job interviews, which may explain my prejudice. Once I had to complete 270 multiple-choice questions about my personality, answering “Yes, very”, “Yes”, “Not sure”, “No” and “No, very”. It was all going fine until the question, “Are you a confident person?”, which almost by law you would have to answer “Not sure.” No, I didn’t get the job.
Now HFM Columbus has commissioned a “psychometric risk-profiling tool”, which the wealth manager hopes will enable it to better understand clients’ approach to investment and attitude to risk.
“We believe the new psychometric profiler will help us identify carefree people and worriers, those who need more information up-front and are engaged with their investments, and those who are impulsive types who might make quick decisions but who may come to regret them later,” says Marcus Carlton, a director at the firm.
“It is, in short, a more scientific indicator of risk appetite. As well as being able to identify risk traits, the profiler will give us helpful tips on how best to serve those particular clients – for example, the degree to which they will read supporting documentation or not.”
I quite like the idea of the profiler offering its masters helpful tips – and indeed I’d be genuinely interested to discover if the number of clients who actually read supporting documentation is anything other than zero – but it’s the phrase “more scientific” that worries me.
When I started covering investment, I was told it was more an art than a science and I have seen little since to make me question that. One might even argue the recent failures of black-box management in the face of those pesky one-in-a-million events that apparently happen more often than you think would only have strengthened that view.
Certainly the fund manager panel at the SIFA Conference I mentioned here last week laid into investment and risk modelling with gusto, with Craig Heron of Henderson New Star describing it as “a flawed way of running money”. “You lose sight of the practicalities of investment if you buy into these sorts of follow-my-leader ideas,” added Artemis’s Adrian Frost.
“Modelling is an attempt to intellectualise something that can’t – or at least shouldn’t be – intellectualised,” noted M&G’s Richard Woolnough. “The biggest mistake is to think you can manage risk through science,” concluded Richard Evans of Martin Currie. “It always turns out to be an art. Everything is based on 95 per cent certainty.”
Oh, I do love having my prejudices confirmed. Newton also touched on this subject with its thoroughly commendable attempt to stimulate industry debate through the “All change” white paper. I’m afraid I missed the press conference so it might be more professional to quote part of what it inspired Cherry Reynard to write for www.marketing-hub.co.uk.
“In the institutional market – and increasingly in the retail arena – there is a desire to see every manager with a laid-out, repeatable, fully quantifiable process. This is fine in theory, but has forced managers to try and explain the unexplainable. It does not take account of the idea that fund management may have an intuitive, emotional side as well as a quantitative one.” Yup, I think that’s worth the abuse I shall deservedly receive for quoting my other half writing for a site of which I’m editorial director.
When outlining its concerns about risk and investment at that conference, Newton suggested the word “stochastic” came from the Greek word for “guess”. Well, sort of. It literally means “skilful in aiming” and, only by extension, “guess”. Both inherently involve the chance of missing the target but only the artists appear realistic enough to accept that as an actual possibility.
Julian Marr is editorial director of www.marketing-hub.co.uk