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Risk, Risk Profiling and Risk Tolerance.

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Risk Tolerance Assessment Misconceptions

FinaMetrica Pty Ltd - Friday, 21 April 2017

We recently had a request from a long term subscriber John Reilly, the Managing Director of Good Will Financial Services in Bristol to assist in his ongoing due diligence of FinaMetrica's risk profiling integrity..

"Through normal due diligence research, I read this article with an open mind. It became strikingly obvious, when I read a couple of their examples of ‘poor practice’, that they were talking about FinaMetrica (without naming the innocent!). I would be grateful if could respond to these ‘criticisms’ and the other aspects they raise."

We responded:

We see articles like this pop up now and then and while well intended they tend to confuse the subject matter further. Most of the concerns stem from a poor understanding of what risk tolerance is and how it fits into the risk profiling process and psychometric testing. We’ve provided two examples below.

The article references the FCA (FSA), paper in 2011. We reviewed the FSA paper and wrote to the FSA to clarify some of the misconceptions around risk tolerance assessment and psychometrics. You can read our comments here. We had no response from the FSA and the guidance was finalised a few months later with no meaningful changes.

Our view then and remains now that the FSA paper was a good start to improving risk profiling but set a very low standard. We reviewed all of their comments and decided that we could only reduce the effectiveness of our test if we followed their 'advice'. Hence we’ve made no changes on our end.

For example 1:

Extract from :

Compared to others, how much of a risk taker are you?This question requires the client not only to make a judgement about themselves based on undefined and subjective multiple choiceanswers but also to make a judgement about others. It is an impossible question!

Roszkowski (1992) commented that “another ostensibly straight forward approach to assessing risk tolerance involves asking the client to classify himself or herself with respect to the amount of risk that he or she can tolerance”. It should never be the sole basis for determining a client's risk tolerance, but along with other items, a global self-rating adds to the assessment process because it captures elements that the other items may not be able to tap.

Furthermore, the research literature shows that people can to some degree estimate their own risk tolerance among others. Grable et al (2006) conclude: "Self-assessed financial risk tolerance was found to be a statistically significant predictor of general financial risk tolerance, cash holdings, and equity holdings, both by itself and when analysed using control variables. The amount of variance explained by self-assessed risk tolerance, by itself, ranged from 2% for cash holdings to 27% for general risk tolerance." In a study using The American College's Survey of Financial Risk Tolerance, Grable and Roszkowski also found that the correlation between self-assessed risk tolerance and risk tolerance as assessed by the other items in the test to be .41.

The LSE analysis of FinaMetrica data shows that the self-rating questions scored very well. They have high correlations with the other items and load strongly on the risk tolerance factor and Doehman (2005) paper provided strong evidence regarding how predictive a global self-assessment of risk tolerance can be.

For example 2:

Extract from :

Is it more important to you that your money keeps its buying power or that you dont suffer a loss?This question expects the client to compare two non-opposing factors.Maintaining buying power is not the oppositeof not suffering a loss. It is like asking, Do you prefer vegetables or holidays?

The question as presented is poorly worded and requires the contextual explanation before it.

We agree with the article that risk profiling is the start of a conversation, a discussion piece; however, the measurement of risk tolerance should be done using a proven scientific discipline like psychometrics.

Advisers are responsible for the processes and tools used in formulating advice. Advisers must satisfy themselves that, at a minimum, any tool used is both fit for purpose and true to label. Our Due Diligence Checklist is designed to help you conduct due diligence on any risk tolerance test in the market, including ours, we’ve completed one for FinaMetrica at the end of the checklist for you.

Roszkowski, M. J. How to assess a client’s financial risk tolerance: The basics. Personal financial risk tolerance. Bryn Mawr, PA: The American College, (1992) pages 6 to 7.

Grable, J., Roszkowski, M., Joo, S., O’Neill, B., & Lytton, R. How Well Do Individuals Assess Their Own Risk Tolerance? An Empirical Investigation. Consumer Interests Annual, (American Council on Consumer Interests), (2006), 52, 229

Dohmen, Thomas J., et al. "Individual risk attitudes: New evidence from a large, representative, experimentally-validated survey." (2005).


Posted: 21/04/2017 3:51:05 PM by FinaMetrica Pty Ltd | with 0 comments

Professional Judgement and Risk Profiling

FinaMetrica Pty Ltd - Friday, 03 March 2017

University of Georgia (UGA) Research Project

FinaMetrica supports the advancement of financial planning by promoting and in some cases performing fundamental research in the field of financial planning. It is our pleasure, together with PlanPlus, an alliance partner, to participate in a research project with Dr. John Grable and his team at the University of Georgia to better understand the role of professional judgement in arriving at an investor risk profile.

The survey will only take around 15 minutes to complete and your participation is much appreciated. Below is a message from UGA and Dr. Grable explaining the research in more detail.

From UGA and Dr. John Grable
You are receiving this invitation to complete a survey about risk profiling because of your expertise in financial planning. My colleagues and I are collecting feedback from a sample of financial planning professionals about the factors used to shape a client’s risk profile during the portfolio development stage of the financial planning process.

I anticipate that it will take you 15 minutes to complete the survey. When you click on the link you will be asked to evaluate three to five scenarios. You will also be asked to provide some information about your practice.

Getting to the survey is easy. Simply follow this link:

As a study originating at the University of Georgia, I want to assure you that your responses to the questions asked will remain confidential. No identifying information about your personally will be saved or coded in the dataset. Here is more information about your rights as a survey participant:

I am a professor in the Department of Financial Planning, Housing, and Consumer Economics at The University of Georgia. I invite you to participate in a research study entitled Financial Risk Profiling. The purpose of this study is to identify elements of the risk profiling process and to determine how financial planners use risk profile scores when forming portfolio recommendations.

Your participation will involve reviewing a set of standardized scenarios and ranking the inputs that you consider important in shaping a client’s risk profile. An additional element involves making a portfolio allocation recommendation. The survey process should only take about 15 minutes. Your involvement in the study is voluntary, and you may choose not to participate or to stop at any time without penalty or loss of benefits to which you are otherwise entitled. My team and I plan to analyze the collected data and publish the results in outlets such as The Journal of Financial Planning, but your name or any identifying information will not be used. In fact, the published results will be presented in summary form only.

If you decide to stop or withdraw from the study, the information/data collected from or about you up to the point of your withdrawal will be kept as part of the study and may continue to be analyzed. Do note that this is a confidential study and only my team and I will have access to data. We have plans to secure the data by removing any identifiers to respondents. The findings from this project may provide information on the way financial planners conceptualize client risk profiles. There are no known risks or discomforts associated with this research. At the end of the survey you may request that you receive a summary of the findings.

If you have any questions about this research project, please feel free to email me at: or call me at 706-542-4758. Questions or concerns about your rights as a research participant should be directed to The Chairperson, University of Georgia Institutional Review Board, 609 Boyd GSRC, Athens, Georgia 30602; telephone (706) 542-3199; email address

By continuing with the survey, you are agreeing to participate in the above described research project.

Thank you for your consideration! Please print and keep this letter for your records.

Sincerely, John Grable, Ph.D., CFP®


Posted: 3/03/2017 10:38:03 AM by FinaMetrica Pty Ltd | with 0 comments

RLAM’s GMAPs Risk Rated by FinaMetrica

FinaMetrica Pty Ltd - Friday, 03 March 2017

Royal London Asset Management (RLAM) are delighted to announce that the Global Multi Asset Portfolios (GMAPs) have been mapped to the FinaMetrica risk tolerance scores.

The GMAPs are a range of six multi asset funds designed to offer investors diversified exposure across different asset types in line with their investment objectives and appetite for risk. The Funds are all actively managed and combine strategic and tactical asset allocation with the aim of maximising real return over the medium to long term, subject to a given level of expected risk.

The Funds’ strategic benchmarks were constructed in consultation with Moody’s, while tactical portfolio positioning is influenced by the Investment Clock, a model linking the global economic cycle with the performance of various investments. The Funds invest across RLAM’s range of actively managed fixed income funds and low cost equity trackers as well as property, commodities and cash.

For more information, visit:

Posted: 3/03/2017 10:27:30 AM by FinaMetrica Pty Ltd | with 0 comments

Investment suitability hits the mainstream

Paul Resnik - Friday, 10 February 2017

Suddenly, at the start of 2017, there is a 'buzz' around investment suitability and risk tolerance profiling. That is welcome, encouraging and surprising!

It's surprising on two fronts. First, that it's happening at all. I've been talking about suitability for a long time now, but often to blank stares. So it's great to see investment suitability trending as a topic now. The second surprise is this all happened over the December - January period, when it's usually pretty quiet!

What does it mean? I think it signifies the beginnings of a new consensus that says investment suitability and risk tolerance profiling are serious issues which can no longer be overlooked or ignored. In the US, I believe that 'fiduciary' will become the default standard for advisors by the end of 2017 - regardless of what President Trump does or doesn’t do to the DOL rules.

I am mindful of Aristotle's caution that 'one swallow does not a summer make', however I'm fairly sure that I am seeing a flock of swallows! The articles I am discussing here completely align with my recent experiences in London, India and Hong Kong where - for reasons I can't completely explain - the previously blank stares have been replaced by inquisitive, questioning faces.

I can see three causes:

1. Fear of another crash. People remember the pain of 2008 and we know that another crash will come.
2. Robo-advice has highlighted a problem. Algorithms need science, but regulations are vague platitudes. So uncomfortable questions are being asked.
3. Discussion about the DOL rules in the US are changing investor expectations. Clients are expecting advisors to 'do the right thing' and put their interests first.

Investment suitability is a 'thing' in 2017. It's time to get ready.

What is investment suitability?

In simple terms, investment suitability means that investments meet the needs of the client. There are three questions that need to be dealt with:

1. Does the asset allocation meet the investor's psychological preference for risk?
2. Will it provide liquidity to meet liabilities?
3. Will the allocation provide still provide suitable funds to meet liabilities during or after times of volatility?

Suitability - and financial planning - is inevitably a 'trade-off' between psychological and financial considerations.

Robo-advice must become goals-based
This article eloquently argues that robo-advice must avoid becoming product-centric and 'learn' to focus on the client's goals, by building better advice tools and processes. FinaMetrica is currently involved in a number of integrations to help robos meet the same standards as human advice.

Ontario Securities Commission roundtable on risk profiling
Canada continues to lead with the world by recognising that risk profiling is a complex, multi-dimensional process that combines subjective and objective factors. The roundtable event was an opportunity to obtain stakeholder input, with considerable common ground emerging.

Hong Kong's regulation among the most detailed I've seen
Most regulators are quite vague about risk tolerance and investment suitability, which makes the latest circulars on suitability from Hong Kong's regulator really stand out! The circulars and updates from the Securities & Futures Commission (SFC) are among the better reasoned and comprehensive documents that I have seen from regulators anywhere.

Risk tolerance is not risk capacity (and vice-versa)

Many people confuse risk tolerance (a psychological trait) with risk capacity (a financial measure). Many people combine the two measures in one assessment, which commentator Michael Kitces correctly argues is a fatal flaw in design.

Being a 'Fiduciary' is becoming easier thanks to new tools
It's easier to swim with the tide than against it and right now the tide is running toward fiduciary, with a host of new tools available to advisors to prove they are meeting the required processes and standards. Industry expert Bob Veres reviews a range of the new tools in this article.

Posted: 10/02/2017 10:18:30 AM by Paul Resnik | with 0 comments

FinaMetrica maps to Royal London Portfolios

Paul Resnik - Tuesday, 22 November 2016

Royal London are pleased to announce that their nine Governed Portfolios and five Governed Retirement Income Portfolios have been mapped to the FinaMetrica risk tolerance scores. .

The Governed Portfolios are a range of off-the-shelf investment solutions built for customers looking to save into a pension. There are nine risk graded portfolios; all come with regular governance reviews and auto rebalancing at no extra charge. You can also change the default equity fund to any available within our range.

The Governed Retirement Income Portfolios (GRIPs) are specifically designed for customers who are looking to take a regular income. They are available through Pension Portfolio Income Release, or for workplace pensions, through their award winning Target Lifestyle Strategies which target drawdown. They come with the same expert governance and automatic updates that the Governed Portfolios benefit from to help keep the portfolios on track.

Posted: 22/11/2016 1:54:02 PM by Paul Resnik | with 0 comments

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