Are you stuck in the past with risk profiling?

It is easy for risk profiling to become just another tick-box exercise that we need to do as part of the advice process.

Often, we have questionnaires for our clients that were made up by someone in the firm many years ago, aren’t based on any researched methodology and, more importantly, don’t engage the client.

I often hear that it's the conversation – how we explain risk to the client – that's the most important thing, and this has long been my philosophy. But are we missing a trick?

How do we ensure that we're getting the behavioural information from our clients to
ensure we understand both their risk tolerance and how they will feel and behave during market turmoil? How do we ensure that our own biases towards risk don’t creep into the conversation and influence the outcome for our clients? 

I read a study by behavioural profiling software firm Oxford Risk which found that 68% of advisers are "sometimes surprised by the decisions their clients make." And when providing advisers within the same firm the exact same client case study, the client received portfolios that varied from very low-risk to very high, which highlights how bias can impact client portfolio outcomes.

Technology should complement the expertise we advisers bring to our clients. We now have software that can determine not just a client’s risk tolerance but also their capacity for risk and how their personality might affect the decisions they make about investing (especially in volatile markets). These tools allow us to have deeper conversations with our clients while also helping us to avoid influencing the advice with our own biases.

I think if we embrace what’s available now in behavioural profiling technology, we can engage our clients with their investment choices and understand how to help them through tough times to achieve their goals.

How are you engaging clients with risk?