Are most risk-tolerance questionnaires actually useless?

A new view of risk profiling could make financial advisors act more like behavioural coaches

Are most risk-tolerance questionnaires actually useless?
The risk-tolerance tools used by most financial advisors are “very close to useless,” according to one expert.

Ryan Murphy, director of behavioural science at global investment research firm Morningstar, shared that position with financial advisors at the firm’s annual conference, according to To illustrate, he presented the attendees a hypothetical choice between getting a sure US$50 and taking the chance to get US$100 based on a coin flip. At least half the attendees said they’d go for the sure cash.

Murphy then posed the choice several more times, each time lowering the amount of gain being offered with certainty; each time the safe reward was reduced, enthusiasm for it waned.

“People have risk aversion,” he said. But most questionnaires don’t consider that risk tolerance shifts depending on the circumstances, and risk tolerance often doesn’t consider the risk clients pose to themselves.

Rather than focus on risk aversion, Murphy said, he and his colleagues have been working on a so-called “goals-based” risk analysis tool. The tool is being built around a framework of findings from the emerging field of behavioural finance. It considers not just loss tolerance, but also client goals and behaviour.

Morningstar research suggests that investors’ self-defeating behaviour, such as selling at the wrong time, costs them anywhere from 1 to 2.5% every year. To arm them against themselves, Murphy is pushing for a view of risk profiling where financial advisors act as behavioural coaches who go beyond a financial plan by building up their resilience to market movements.

Clients with high “resilience risk,” according to the article, might not need much reassurance or contact; others might need a behavioural coach who’d reach out to them in times of market stress. Some might be okay with short-term fluctuations as long as there’s long-run growth, but others might be more comfortable saving or preserving their capital.

The risk-analysis tool, which Morningstar plans to eventually make available on its advisor platform, aims to help advisors become counsellors as well as investment managers.

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