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January 26, 2018 at 09:32 AM
How much risk are your clients willing to take to get the level of returns they seek? It’s a crucial question for financial advisors, especially now when the bull market is on the verge of entering its 10th year and interest rates are rising in the U.S. and other developed economies.
Advisors typically use a risk tolerance questionnaire to make that assessment, and now there is a new one on the market, developed by Finworx, based on the tenets of behavioral finance.
The Finworx360 questionnaire asks 5-17 risk questions and 7-8 behavioral bias questions in order to develop a client risk profile that the advisor can use to create an investment strategy and help develop a trusting relationship.
The questions are designed to gauge a client’s view of investment gains vs. losses and of protecting savings vs. collecting higher returns, as well as their tolerance for long-term drawdowns and willingness to borrow in order to have more funds to invest. Most questions are investment-related, but there is also one about a client’s employment preference — a job with a big company or one with a startup that pays more but is less secure.
Finworx says its risk assessment tools differ from others because it focuses more on a client’s willingness to take risk rather than his or her ability to take risk, resulting in a report of risk preferences and behavioral biases toward investments. It appears to be less about personal feelings than the Financial DNA risk assessment tool, which measures 16 behavioral biases, and more comprehensive than the Riskalyze questionnaire, which yields a single risk tolerance number that can be overlaid on portfolios.
