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.
The Finworx questionnaire generates a report with details on a client’s risk tolerance and biases plus the identification of an investor persona, which advisors can then use to design portfolios and segment clients for communications and marketing purposes.
A client will fall into one of four personas:
the guardian, who values wealth preservation above all else
the inspector, who is more logical and focuses on what’s working in the market
the chief, who is more focused on growth
the outlaw, who is an independent thinker who tends to be contrarian
But even then there can be some nuance when answers to questionnaire queries don’t fit neatly with the persona a client has been assigned. Those inconsistencies can be used by advisors to have a “richer conversation” with clients,” says Jeremy Floyd, FinWorx president and CEO.
Victor Gaxiola, a vice president of the firm and former financial advisor, says Finworx360 can be used in annual reviews with clients and as a means to assess prospective clients, to see if they’re a good fit with an advisor’s practice.
Advisors can try out the Finworx360 in a free two-week trial with limited access of up to five surveys. Afterward the costs are $924 a year for 100 survey completions (equivalent $77 a month) or $1164 ($97 a month) for 500 survey completions. Advisors can also get a monthly subscriptions for slightly more — $97 for 100 surveys and $147 for 500. These costs are generally less than those charged by Riskalyze and equivalent to the Starter Package from Financial DNA ($75 per month).
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