Industry experts Chris Gilchrist and Paul Resnik have clashed over whether it is possible to deliver good investment advice without using psychometric risk questionnaires.
Speaking to Fundweb’s sister publication Money Marketing in June, FiveWays Financial Planning director Gilchrist (pictured) said there is no logic to mapping clients’ attitude to risk score with a corresponding asset allocation.
Speaking at a debate at the Personal Finance Society annual conference in Birmingham last week, Gilchrist said: “I would argue you can only assess the client’s tolerance for risk when you present them with alternatives in a form that is meaningful to them, expressed in monetary terms. Tolerance is situational and specific. You cannot asses it through a set of arbitrary questions.”
He argued cashflow modelling offers a way of assessing capacity for loss, saying: “That way you are measuring actual tolerance for risk with a direct proposition to do with clients’ investments rather than an abstract attitude that is not related to anything in the real world, which is what the questionnaire is.”
But FinaMetrica director Paul Resnik said psychometric questionnaires can give advisers warning about how clients will react in falling markets.
He said: “Knowing somebody’s risk tolerance helps advisers give better advice, as advisers know they have done it properly, and that it is psychometric and intellectually rigorous.
“If you have got more than two people in your business and they are both subjectively trying to assess a client’s risk tolerance, file notes will be confusing. If there are five or 10 advisers you will have the mess we currently have in the industry, with individual assessments of risk tolerance and individual risk terms.”
Resnik added business growth depends on consistent processes, which can be achieved through the use of risk questionnaires.