FinaMetrica recently received feedback from a subscriber that they had switched to a competitor because their risk tolerance tool “also allows me to build a portfolio consistent with [an individual’s] risk by having risk scores assigned for our investments and portfolio managers.”
We understand that all services have strengths and weaknesses and some people think they have found strengths in another product that we don’t have in FinaMetrica’s risk tolerance solution.
But there is a very good reason we don’t link risk tolerance scores directly to a portfolio.
It’s not a technology issue. It’s because it’s just not the right thing to do.
Let me explain our reasoning. An individual’s risk tolerance is just one input to their risk profile. The two other main inputs are how long they have until they need access to their savings and the second is the portfolio variations with which they could cope financially when that happens – that is, their financial capacity.
In many cases, time and capacity are more important factors than risk tolerance when assessing the trade-offs and recommending a portfolio for investors. It makes no sense from a compliance and suitability perspective to link directly from risk tolerance to a portfolio.
Subscribers at risk
We believe it would put our subscribers at risk, as it would exclude the consideration of the two other very important factors in the risk-profiling process.
While the FinaMetrica test may take longer to assess risk tolerance and might seem a little less intuitive, it’s worth the effort because we do test risk tolerance accurately. FinaMetrica’s test is based on science. Our questions are tested for validity and reliability. Both the 12-question and 24-question versions exceed international psychometric standards with, respectively, reliabilities of 0.90 and 0.81 and 95% confidence levels of ±8 and ±10.
We’re market proven. Since we launched in 1998, we’ve worked with over 6000 top-end advisors in 23 countries, completing close to a million profiles.
But being the grandfather of risk profiling doesn’t mean that we aren’t up to date. For instance, we’ve just built a new integration tool that allows advisers a single sign on. We’ve just announced our first link, to Redtail. We have several others underway.
Every adviser is different
We appreciate every adviser is different. We tend to appeal to those that are evidence based. Read what Bob Veres, the highly regarded planning community commentator had to say said when comparing FinaMetrica with Riskalyze. In Bob’s words:
“If I had to stand up in court and defend my process for selecting truly appropriate portfolios for my clients, I’d much rather have FinaMetrica in my corner.”
Underpinning all this is the inescapable conclusion that risk tolerance is a personality trait. Personality tends not to change – our data confirm that. Our subscribers confirm that. No sensible adviser wants a test where the results are likely to vary. Certainly not if it has direct consequences for portfolio construction.
