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The FinaMetrica Blog

Risk, Risk Profiling and Risk Tolerance.

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AJ Bell Adds Passive Funds to FinaMetrica Mapping

FinaMetrica Pty Ltd - Tuesday, 27 June 2017

FinaMetrica is delighted to map AJ Bell’s passive funds. The AJ Bell Passive funds are a range of five funds that looks to deliver the maximum possible return for a level of risk that investors are comfortable with. Ranging from Cautious to Adventurous, these funds cover a broad range of risk profiles, helping advisers find the right solution for their clients.

The AJ Bell investment team work closely with highly regarded economists from Moody’s Analytics to deliver a long term approach that combines different assets to efficiently deliver returns without compromising investors’ tolerance for risk.

To do this, the fund invests collective investments such as funds, ETFs and futures to deliver a highly diversified portfolio of assets including equities, bonds, commercial property and cash to deliver long term returns with a more predictable investment journey by smoothing out the worst of market volatility.

The AJ Bell Passive funds build on the successful MPS that was launched in late 2016 and have already been mapped to FinaMetrica.

Posted: 27/06/2017 2:59:48 PM by FinaMetrica Pty Ltd | with 0 comments

Close Brothers Maps to FinaMetrica

FinaMetrica Pty Ltd - Monday, 19 June 2017

FinaMetrica is delighted to have mapped the Close Brothers Discretionary Funds, Managed Portfolio Service and Discretionary Management Service to our risk tolerance scores, allowing advisers to easily select the right investment solutions to suit their client’s individual needs.

The Close funds and discretionary services are actively managed multi-asset solutions designed to meet the risk and return requirements of a wide range of clients. All the funds and services are broadly diversified across a wide range of equity, fixed income and alternative assets and sectors and provide access to global investment opportunities. They are powered by a single investment engine and have a consistent approach to asset allocation through Close’s Strategic Asset Allocation framework. Value is added through the investment team’s Tactical Asset Allocation overlay. Close’s philosophy of prudent management of capital underpins their investment process.

Close’s offerings provide choice for advisers as to the service which is right for their client -

• The Close Discretionary Funds consist of the directly invested “Portfolio” Funds, the fund-of funds “Managed” Funds and the active/passive “Tactical Select Passive” Funds

• The Managed Portfolio Service invests in a broad range of third-party funds and is available on a range of platforms.

The Discretionary Management Service is a full segregated DFM service which invests in a mixture of direct holdings and third-party funds and is tailored to the client’s risk and return tolerance. Find out more about the close range here.

Posted: 19/06/2017 4:17:36 PM by FinaMetrica Pty Ltd | with 0 comments

Risk Behaviour Doesn't Change Risk Tolerance

FinaMetrica Pty Ltd - Wednesday, 24 May 2017

There's an increasing interest in risk profiling around the globe. We now have several competitors. Many new risk profile providers must feel obliged to provide a new insight that shows their research revealing established views (often FinaMetrica's views based on our almost 20 years and over million test experience) as wrong. Unfortunately their conclusions can be based on flawed thinking or flawed inputs. This is a recent example, and our response, raised by a Sydney based subscriber.

“I was at the Morningstar conference and a presenter commented along the lines that: "...the value of risk tolerance profiling is questionable at best because research shows that clients with a high risk tolerance don't behave accordingly. Clients with a low risk score are the ones that stay the course (according to what their profiling questionnaire revealed)". To this point then I am interested to know if you have any research that shows the percentage of clients that behave differently to what their profile suggests.”

We are not at all surprised by the Morningstar research as we have reservations about the outputs of their risk profiling. In particular, their risk profile appears to ask a combination of risk tolerance, risk capacity, time horizon and experience questions (a combination of psychological and financial questions).

It is well documented that psychological and financial attributes cannot be assessed together, they need to be separated and then mapped to a common parameter so that informed trade-offs can be made. If they are assessed together then the result is an average that is not at all useful to the client or advisor. Here's a simplistic example, someone with a long time horizon and a low risk tolerance will be given the same outcome as someone with a short time horizon and a high risk tolerance and we know that these two clients require different strategies.

Furthermore, many (as seen by Morningstar) often mistakenly “equate” risk tolerance with risk behaviour and interpret changed risk behaviour as changed risk tolerance.

Just because someone’s behaviour has changed doesn’t mean that their risk tolerance has changed. Behaviour in risky situations will not be a function of risk tolerance alone. Goals, the perceived risk, the perceived alternatives, the level of trust in an advisor if one is involved, etc. will all play a part. We know that risk tolerance is stable - even through a Bear market (see reference below).  When behaviour changed in the last Bear market, it was much more likely to be because perceptions of risk had changed. Clients (and many advisors) simply had no idea that what did happen could happen. Perceptions of risk can change in an instant. Questioning advisors who say that their clients’ risk tolerance has changed usually leads to their agreeing that this view is an assumption based on observed behavioural change.
A more likely explanation of why people may not stay the course is that risks and trade-offs were not properly assessed and explained and you have a miss-match. That is, the questionnaire used is not reliable or accurate and the risks in the product is not properly explained and people are surprised. When people are surprised they react accordingly, as described by Robert Kiddell during the 07 bear market.

"Our practice is divided into two teams – ours uses FinaMetrica, the other does not. Our team has observed FinaMetrica's worth because our team's clients stayed in their seats for the 2007-09 rollercoaster ride, whereas a number of the other team's clients have abandoned their seats at or near the bottom."

Robert Kiddell CFP
McMillan Financial Planning Pty Ltd

The FinaMetrica lexicon of risk terms may be of value. It offers over 50 definitions, several of which are often used interchangeably, leading to poor communication.

Reference: Roszkowski, M. & Davey, G. (2010). Risk Perception and Risk Tolerance Changes Attributable to the 2008 Economic Crisis: A Subtle but Critical Difference, Journal of Financial Service Professionals, July, 42-53.
Grable, John E., Wookjae Heo, and Michelle Kruger. 2016. “The Intertemporal Persistence of Risk Tolerance Scores.” Journal of Financial Planning 29 (8): 42–51.


Posted: 24/05/2017 10:06:16 AM by FinaMetrica Pty Ltd | with 0 comments

New risk score mappings to Vanguard LifeStrategy® Funds

FinaMetrica Pty Ltd - Friday, 19 May 2017

FinaMetrica is delighted to have mapped the Vanguard LifeStrategy® Funds to our risk tolerance scores, allowing advisors to easily select the right portfolio to suit their client's individual need.

What sets Vanguard apart – and lets Vanguard put investors first around the world – is the ownership structure of The Vanguard Group, Inc. Rather than being publicly traded or owned by a small group of individuals, The Vanguard Group is owned by Vanguard’s US-domiciled funds. Those funds, in turn, are owned by their investors. This unique mutual structure aligns our interests with those of our investors and drives the culture, philosophy and policies throughout the Vanguard organisation worldwide. As a result, global investors benefit from Vanguard’s stability and experience, low costs and client focus.

Vanguard LifeStrategy® Funds include a family of portfolios with different levels of potential risk and return. Each fund offers a diversified blend of stock market equities and bonds, built using Vanguard’s underlying cost-efficient index funds. They provide professionally constructed and diversified portfolios designed to help your clients meet their goals, whatever their attitude to risk.

Find out more about Vanguard LifeStrategy® here.

Posted: 19/05/2017 4:17:36 PM by FinaMetrica Pty Ltd | with 0 comments

Mapping of the Momentum UK Managed Portfolio Range

FinaMetrica Pty Ltd - Monday, 24 April 2017

FinaMetrica is delighted to announce that the Momentum UK Managed Portfolio range is now mapped to the FinaMetrica risk tolerance scores.

The Momentum Managed Portfolios are an outcomes-based solution designed to give investors access to discretionary investment strategies. These solutions are structured to provide a sophisticated investment offering that aims to perform strongly in an array of market conditions and is very competitively priced. This Managed range consists of six Managed Portfolios designed to cater for a wide range of risk and return appetites. All the Portfolios utilise our investment desk’s macroeconomic views, asset allocation framework and contain investment instruments carefully selected by the team from leading global financial institutions.

The Portfolios target inflation plus returns over four or more years. They are broadly diversified investing in a range of equities, fixed income, cash, property and alternative strategies. The Portfolios’ asset allocations are actively managed and reflect Momentum’s views on asset classes, regions and currency. These can be implemented using either active or passive strategies. The Portfolios are also rebalanced on a regular basis to ensure that the asset allocations adhere to the original risk profiles.

For more information, visit:

Posted: 24/04/2017 10:39:38 AM by FinaMetrica Pty Ltd | with 0 comments