The risk questionnaire is a standard part of every new client interview, but does it work? An Australian company claims it's got a better way to determine just how much risk your clients can take.
FinAmetrica co-founder Geoff Davey points to academics who looked at a lot of risk questionnaires and found that "risk-averse" clients still ended up with 0% to 70% stock allocations while "aggressive" ones ended up with 50% to 100% in stock.
That's an incredibly wide range -- reminiscent of the allocations used by target date funds -- and reflects what Davey says is the unscientific nature of the old-fashioned survey.
While we can't yet gauge his claim to have come up with a better mousetrap, the sheer overlap between what investors say are their risk tolerances and the investments advisors put them in is truly stunning.
In theory, a very conservative and a very aggressive investor could both be put in the exact same portfolio -- 70% stock, 30% fixed income.
That's not only dangerous for the risk-averse client, but potentially a fairly serious breach of the suitability standard. But in a world where traditionally risk-averse retirees are increasingly invested in stocks "for appreciation over the long term," it's easy to see where it comes from.
The question is whether we all need to reassess what we mean by risk and how we manage it in the post-recession world.