From the September 2010 issue of Investment Advisor • Subscribe!

Retirement Planning: FinaMetrica's Davey Talks of Risk Profiling for Clients

Can psychometric risk assessments help clients stay with the program through turbulent times?

Can scientific risk profiling help you manage wealth for your clients? For investment advisors--who, as fiduciaries, are used to a process-driven approach--a system for profiling risk sounds like it could be very useful. Geoff Davey, co-founder of Sydney, Australia-based FinaMetrica, spoke about how to use psychometrics to measure client attitudes toward risk, at the fi360 National Conference in May.

Psychometrics is "the science of test construction," using "psychology and statistics," according to FinaMetrica's Web site. The FinaMetrica assessment helps wealth managers gauge clients' risk tolerances in these three areas: first, "psychological risk tolerance," or "How much risk do you prefer to take?" Second, "risk capacity," or "How much risk can you afford to take?" And third, "risk requirements," or "How much risk do you need to take?" Davey asserts that "psychometric" testing is "more accurate than interviews" of clients for assessing risk tolerance.

Wealth managers can use the results in the planning process and link the risk tolerance of the client to an appropriate portfolio. The assessment also offers an opportunity to discuss risk with clients as it applies to their particular situation. Davey told WealthManagerWeb.com that the FinaMetrica process helps "to avoid the big mismatches." He adds that, "when you occasionally see a bad match--it's usually a misunderstanding of risk tolerance." Understanding their own risk tolerance and matching that to the appropriate risk level in their portfolio would, understandably, help a client to be more comfortable with the market volatility that accompanies every portfolio. Assessing the risk tolerance level is the critical issue.

Davey says the system is best utilized by integrating FinaMetrica with planning software such as MoneyGuidePro or Finance Logix. The system is slated to be integrated into fi360's Toolkit this year, as well. In addition to Australia, FinaMetrica's system is used in the U.S., U.K., Ireland, Germany, Austria, Switzerland, Hong Kong, India, and South Africa.

Harold Evensky, president of Evensky & Katz in Coral Gables, Florida, (and my colleague on The Committee for the Fiduciary Standard), has used FinaMetrica for a "long time," in his wealth management practice, for "risk profiling and as an educational tool." He says he finds it very "useful--it's the only questionnaire I know of that has any substantive development behind it," noting that Davey had enlisted the help of academics to develop the system. Evensky combines the FinaMetrica questionnaire with his firm's "own proprietary" one as well. He notes that, "occasionally clients answer a question in a way that contradicts the overall rating," and that requires further discussion. Evensky explains that the system is very helpful for "framing clients' expectations in advance," particularly useful in markets with the kind of volatility that we have seen recently.

Davey was a financial planner and founded a financial planning firm in Australia in the early days of planning, 1972. He sold that firm--which had a staff of 100, in 1989, according to the FinaMetrica Web site. He is a member of the Australian Financial Planning Association (AFPA) and the U.S. Financial Planning Association (FPA)--and chairs the 2010 U.S. FPA's Asia-Pacific Focus Group.


Kathleen M. McBride is Editor-in-Chief of Wealth Manager and a member of The Committee for the Fiduciary Standard. She can be reached at kmcbride@wealthmanagerweb.com.

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