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Nic Cicutti: Why remote risk profiling won’t cut it

How much help do clients really need from their advisers? And is the best way of providing it a face-to-face meeting?

I was pondering on this question recently when writing an article for a consumer magazine on how to manage investment risk.

I took a look at the options available for those who want to assess their own attitudes to risk before making decisions about where to invest. The truth is, there is not an awful lot available in the public online sphere.

Barclays signposts users to a set of web pages by its behavioural science team, with some excellent articles on there, but when you try to click through to its “free personality test that will give you a basic idea of your own investing tendencies” the link appears to have been taken down.

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There are a few helpful tools out there, though. Standard Life offers a 10-question online survey to help users understand their risk appetite. The survey invites users to agree or disagree, strongly or otherwise, to a number of propositions, such as “My friends would say that I am cautious” or “I prefer my money to be safe from risk”. Based on the answers, it scores a person on a scale between 0 and 100.

Variants of the same questions are also asked by Royal London, although the potential profile outcomes are slightly different. In my case, the Royal London profile of my appetite for risk was marginally higher than the Standard Life one. Not so much it was impossible to reconcile the two profiles but it goes to show minor changes in a person’s reply to what is, after all, a very basic questionnaire may produce different results.

One of the most detailed, if occasionally annoying (but only in relation to some of the questions asked) comes from Schroders. The firm offers would-be investors a much more in-depth online questionnaire called InvestIQ, based on a series of improbable, hypothetical scenarios geared around an airport flight delay.

Completing it takes about 10 minutes, at the end of which it provides a four-page analysis purporting to tell you what kind of an investor you are. It told me I am a Vigilant Planner: someone who likes to do his homework and is most likely to worry excessively about making a decision. My defining characteristic is that I am anxious about investing and least likely to act impulsively. I will come back to that in a second.

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While most advisers that use a rage of similar psychometric profiling services do so from a number of specialist firms – including FinaMetrica, Intelliflo and Dynamic Planner – many of the risk profiling questionnaires, including the one from Standard Life, are provided by Oxford Risk, an independent team of psychology academics originating from Oxford University.

Oxford Risk also provides psychometric questionnaires through a number of other online investment houses, advisers and banks, such as RBS and Brewin Dolphin.

Regardless of which tool is used, what is intriguing is the way most advisers do not allow prospective clients to access their questionnaires without first registering with them or making contact. In some cases, profiles can only be completed in the course of formal face-to-face meetings.

Perhaps the most cogent rationale for this approach was made in an article last year by Colin Low, managing director at Suffolk-based advisers Kingsfleet Wealth. He said: “What I am noticing 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.”

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He is both wrong – and right. Most of the risk profile tools I road-tested also identified that my tendency to take my time by weighing up options in more detail potentially made me a more risk-averse investor. In that sense, I would not need to sit opposite Low for that factual nugget to stand out.

Yet it strikes me it is possible to be both careful about carrying out research before making an investment decision and willing to accept higher levels of risk inherent in the process. Which is where face-to-face comes in: I would hope Low would spot that fact about me too before advising on my portfolio.

My brief foray into this risk profiling world indicates that, while online tools and questionnaires can work and will give people a good basic understanding of themselves as potential investors, a good adviser that knows them well remains the gold-standard way for them to make better decisions about money.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. I have just completed a dissertation on the effectiveness of risk tolerance assessment – research shows non financial questions were best but a discussion to compare the outcome with what that would suggest is essential

  2. Interesting and I largely agree. Suggests that Robo-advice is always going to be less than optimal. However, will the FCA ever recognise that? Evidence, at least anecdotal, suggests that they hold advisers to a higher standard than Robos.

    • Quite so. I always used to comment on the results in my reports to the client. An absolute certainty that in a 20 item questionnaire some of the answers will contradict one another. And then there is the matter of what the form doesn’t ask. Many was the time when a client said they were low risk, but I happened to know that they had a significant portfolio of direct equities, some of which were hair raising. The opposite was also true. At first glance it may seem that the client was fairly risk tolerant, only to discover that they had never invested in equities and had only ever held cash.

      Can machines sort this out? I doubt it.

      Anyway I do find the debate on risk somewhat fatuous. If you are nor prepared to take a risk – don’t invest and just loose value in cash.

  3. When someone develops a time machine to a day when there is a direct link between the volatility of returns and the the supposed level of risk offered by different asset classes wake me up and let me know. Until then there is no Way of ACCURATELY matching assets or funds to the psychological risk tolerance of individuals.

  4. What’s a “rage of similar psychometric profiling services”? (A typo, obviously).

    That aside, most consumers don’t really understand the fundamental principle that the acceptance of short term risk is pretty much essential if one is to achieve long term (higher) returns (than cash/ inflation). So the answers that most consumers (without step by step guidance) enter in response to most of the questions on most risk profiling questionnaires are likely to result in an inappropriately low rating.

    Hence the high levels of consumer interest in Absolute Return funds which, as we’ve seen, (all but) promise but have failed to deliver an alluring but, in practice, extremely difficult to achieve, combination of positive returns, regardless of how markets perform. Derivatives are tricky financial instruments to use and require a whole different skill set from stock picking.

    Even clients who originally completed their original risk questionnaire with face to face guidance are now having to be revisited so their adviser can explain to them that an overly cautious investment strategy is, over the long term, highly unlikely to deliver the levels of growth they’re going to need to achieve their objectives (typically, an adequately sizeable retirement fund). A good analogy is that there’s no need to worry about a rainy day in March when you’re not going on holiday until August.

    So yes, I agree with you Nic that, in most instances, remote risk profiling questionnaires, without lots of side and foot notes (which may well confuse users), are unlikely to deliver a correct result.

  5. Profiling clients by attitude-to-risk has dominated the advice sector however ATR tools leave 90% of the issues involved in investing to be resolved by advisers using ah-hoc methods and processes.
    The issue is not what the client’s ATR profile is, the real issue is how much risk the client needs or can afford to take and it’s the client circumstances not psychological sentiment that determines it.
    Establishing client Need-For-Risk is significantly more client-centric, informative to client and adviser as well as being more robust in terms of investor suitability and regulatory compliance.

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