Difference between revisions of "Planit:FinaMetrica"

From Planipedia
Jump to: navigation, search
Line 36: Line 36:
Here’s an example of what this might look like:
Here’s an example of what this might look like:
During our review of the differences highlighted in your FinaMetrica risk profile report we agreed that your tolerance for investment risk was lower than indicated by your overall risk tolerance score. For this reason I am recommending the "Income and Growth" portfolio as opposed to the "Balanced" portfolio. The Income and Growth portfolio is slightly more conservative, containing a somewhat higher proportion of fixed income investments. I feel this portfolio recommendation more closely matches your comfort with investment risk and also your investment objectives relative to time horizon and risk capacity.

Revision as of 18:59, 29 November 2011

PlanPlus Planit.jpg PlanPlus Planit User Guide Table of Contents

FinaMetrica 25 Question Risk Profile Discussing Your Client’s Risk Profile Report

The primary purpose of the Risk Profiling process, including discussion of the Risk Profile report, is to clarify and document your client’s instructions to you about the level of financial risk they would prefer to take.

In this context there are things you must do to ensure that you have instructions upon which you can rely - see Must Do below. Further discussion of the Risk Profile report will help you quickly develop an in-depth understanding of your client and accelerate the establishment of a relationship of trust – see Should Do and Could Do below.

Must Do

Confirm Report Accuracy You must ask your client whether the report is accurate (because you will treat it as their instructions to you about the level of risk they would normally choose to take.) Some clients will be surprised by their scores and may question the accuracy of the report. You should ask them to go through the Risk Group description, as modified by any differences reported, and point out any ‘inaccuracies’. Remember that the report is a literal summary of the answers they gave.

If they identify something they consider inaccurate, go back to the completed questionnaire and look at the actual answer with them. It is possible that they made a mechanical mistake in selecting an answer option. One such mistake will not affect the risk tolerance score by more than a couple of points. The mistake should be noted and the score can be used as it stands. If there are multiple mistakes, the questionnaire should be done again.

Sometimes your client will confirm that the report is an accurate summary of the answers they gave but will still have difficulty accepting their score. You should explain that the score is simply the result of an objective, statistical comparison between their answers and the answers given by a sample of the adult population.

If their score is lower than expected, that’s because they under-estimate the risk tolerance of the adult population - vice versa if their score is higher than expected. In either case, ask them to talk about how they formed their views about other people’s risk tolerance. Who are they comparing themselves to?

Explore Investment Choices Once you have dealt with the accuracy of the report, you should explore the Investment section and, in particular, any differences reported there. Such differences will occur in virtually all profiles. Now is a good time to begin educating your client about risk and return, managing their expectations and laying the ground work for obtaining their informed consent. FinaMetrica’s Risk and Return Guide will be helpful here. This document links the plain-English of the client’s FinaMetrica Risk Profile report to the risk and return characteristics of investment portfolios.

For example, in Jean Sample's risk profile report we see that Portfolio 5 is her preferred portfolio (Q16). Her downside comfort zone is a fall of 20% (Q14) and she expects her investments to earn twice the ‘risk free’ rate (Q21). All of these are consistent with her score of 58, which places her in Risk Group 5.

However, suppose Jean Sample had chosen a fall of 10% or less as her downside comfort zone limit(Q14). This would have been reported in italics as a difference and would need to be explored. Is she willing to feel uncomfortable from time to time? If a fall was, say, minus 20%, how much more uncomfortable would she feel? Would such a fall ever be acceptable? Some people will be willing to bear sustained periods of significant discomfort and some will not.

In most cases, your clients will be happy to sign-off on their risk profile reports as presented. However, following the discussion outlined above (and those suggested below, if done) they and you may agree that an adjusted risk tolerance score is more appropriate. In which case, you should make comments in the Portfolio Objective screen on the Selection and Validation tab with an adjustment to the selected portfolio to more appropriately match the client’s risk tolerance.

Here’s an example of what this might look like:


Should Do

“Should” is used in the sense that effort spent here will invariably be worthwhile. There are no hard and fast rules. If there is a very inaccurate self-impression or some particularly significant difference reported, you may start with that. Alternatively, you may begin with general questions about (recent) financial experiences, attitudes to risk and return, etc., which can then lead to opening up discussion on the topics below.

Check Risk Groups On average, male clients are Risk Group 5 and female clients are Risk Group 4. Where a client is two or more Risk Groups away from these averages, they are ‘outliers’ and this should be discussed.

Check Self-Impression If your client’s estimate of their risk tolerance is ten or more points away from their actual score you should certainly discuss this with them. It is likely that the issue will have already been raised under Report Accuracy above. But, if it hasn’t, you should raise it, following the explanation outlined previously. Even if the difference is only five points, there should be some benefit in a brief discussion.

Check Number of Differences Typically, there will be from three to five differences. Differences occur because, while those within a Risk Group are similar, they are not clones. Clients whose scores fall at either end of a Risk Group tend to have more differences than those in the middle. The number of differences is an indication of the client's consistency when it comes to financial issues. Occasionally, a client will have many differences – eight or more, indicating a lack of consistency in financial matters. Of itself, this is not a negative characteristic - some people are just less consistent that others. However, it is helpful to both client and adviser for this to have been identified openly at the very start of the relationship.

Explore Differences Differences provide an opportunity to open up discussion. Each represents an aspect of your client where they differ from those with whom they are otherwise similar. Differences will be either low or high, i.e. your client’s answer indicates less (low) or more (high) risk tolerance than is typical for their Risk Group.

All of Jean’s differences are low differences – as you might expect given that her score, 58, is at the bottom end of Risk Group 5’s range of 55 to 64. Obviously, differences that are significantly outside the range are more important than those just outside. Jean’s thinking of “risk” as “uncertainty” is just outside the Group 5 range, but Jean’s score is close to Group 4 anyway. However, if it had been “danger”, which is typical of Groups 1 and 2, that would have been a significant difference.

For any difference, low or high, it is appropriate to ask why your client thinks it might be that they chose a lower/higher option than is typical of their Risk Group. But, it’s important not to make too much of any particular difference. Remember, these are real people not clones.

However, you should look for any difference between the level of risk your client is now willing to take, in Making Financial Decisions, and the level they’ve taken previously, in Financial Past. If there’s been a change, you’ll want to know why.

Could Do

There are many possible applications for the information contained in the Risk Profile Report (and the completed questionnaire.) Let’s look at two examples:

Q4. “Thrill” Investments (Financial Past) Whatever the client’s answer, exploring this issue - Why? Why not? What results? Would you do it now? - is invariably highly informative. N.B. The client’s answer to Q4 is only reported for Risk Groups 4-7 because it is extremely rare for someone in Risk Groups 1-3 to answer “Yes”. However, you can always check a Risk Group 1-3’s completed questionnaire.

Q11. Borrowed to Invest? (Financial Past) If “Yes”, it will be informative to ask, Why? How? Results? Do again? Similarly, if “No”, try asking "Why not"? Would you now? … but remember that older females may never have had the opportunity.

Q22. Government Benefits & Tax Advantages Many advisers’ value-add involves arbitraging the Social Security and/or Taxation systems. But there are risks here and quite extreme differences in clients’ attitudes. Some clients have a strong aversion to paying tax and/or will do almost anything to obtain a government benefit. Others are deeply concerned about being seen, or seeing themselves, as tax or social security cheats. Some exploration of these sensitivities could prove useful.