by Tommy Watson
Risk profile questionnaires always seem to be a divisive topic. For some, these questionnaires are a compliance-driven necessity. For others, they can be the factor in determining your client’s portfolio.
This article isn’t about whether you should use a risk profile questionnaire or not but rather about how if you do, you can make it much more than a box-ticking exercise. A risk profile questionnaire may even become an integral part of your client discussion.
I have always found risk profile questionnaires a great starting point for a conversation about risk and reward, particularly for those new to long term investments. I’m a firm believer that a rational investor will only take the level of risk necessary to achieve their objectives. Of course, a risk profile questionnaire is never going to be able to tell you this, but that doesn’t mean it can’t add value when identifying a long-term investment strategy.
It may be that a client has indicated they’d be uncomfortable with a drop of 10% in long-term investments, but I’m recommending a portfolio that has historically fallen by 30% or more in times of extreme market volatility and will likely do so again. How a client expects to feel after a hypothetical fall in value is important, but the most important thing is what action they would take when there is a real temporary market decline.
By addressing this at outset, we can then have open conversations about how the client might react or have reacted in the past. These lifeboat drills make risk conversations unsurprising when emotions might be high in the midst of a declining market and a client feels like they need to take action. I can’t tell you how helpful this has been over the last 6 months. Clients know what to expect, and whilst it might feel uncomfortable, they know this has always been part of the plan.
Your risk profile questionnaire can also form part of a bigger educational conversation with clients to help develop their understanding around investments. By talking about the risk and reward relationship, a client will be better placed to understand the risks they might need to take to achieve their objectives. Likewise, now more than ever the answers from previous questionnaires can help encourage those good behaviours. Maybe a client who previously said a 10% fall would make them feel uncomfortable, has experienced a much bigger decline without feeling the need to take action. Tell them how well they’re doing! Re-enforcing the good behaviour will help your clients think differently about risk.
Over the last month or so two client conversations spring to mind that have both been prompted because of discussions around risk profile questionnaires.
One is a new client investing a significant sum for the first time following a business sale. As part of our investment discussion, we reviewed some of the answers to her risk profile questionnaire, talked about how she has felt during the last few months market volatility and also how to manage investing emotionally. Following this conversation this client said she felt like we knew her so well, all because we could relate to how she felt about risk. Don’t underestimate how important these answers to a simple questionnaire can be and the value you can take from them.
The second is a long-standing client who has experienced a number of market falls. As with most things in life the more we do something the easier it becomes: sitting tight when markets are falling is no different. At her recent annual planning meeting the conversation turned to investments and her risk profile. This client actually asked to re-complete the questionnaire as she was sure her score would be higher this time! She was right, and she’d even correctly guessed her score. Did that lead us to recommend a higher risk portfolio? No. We recommended the level of risk in her portfolio because of a number factors, not because of the outcome of a questionnaire.
So, if a risk profile questionnaire is part of your process, make sure you get the most out of this, you’ll be amazed of some of the great conversations that can come about as a result of some simple box ticking.
Tommy is a Client Manager at Paradigm Norton’s London office, becoming part of the PN team in 2017 following the merger with The Red House.
A Chartered Financial Planner and Fellow of the PFS, Tommy is responsible for delivering a highly personalised, holistic, financial planning service to a select group of clients. Tommy co-leads Paradigm Norton’s London office, is a Trustee of the Paradigm Norton Employee Ownership Trust and a member of the firms Culture and Values committee. A Business Finance graduate from Durham University, Tommy has over 10 years’ experience working in financial services, both in the UK and Singapore before joining The Red House in 2014.
Outside of work, Tommy is a fan of most sports and enjoys following his beloved Everton around the UK. Always keen for a physical challenge, he has climbed Mount Kilimanjaro, cycled the length of the UK and completed a number of marathons, triathlons and open water swims.