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., UK, Ireland, Germany, Austria, Switzerland, Honk Kong, India and South Africa.