Humans look at risk and reward in the context of their own personal financial position. We all look at risk differently, based on our varying life experiences and financial position.
Riskalyze's Risk Assessments allow you to objectively pinpoint an individual investor's risk tolerance. Furthermore, Riskalyze portfolio and retirement map functionality provide a quantifiable way to match investor risk preference with a corresponding portfolio and retirement plan.
The Risk Questionnaire process was built upon decades worth of behavioral economic work including but not limited to the academic framework called Prospect Theory that won the Nobel Prize for Economics in 2002.
The Risk Number and corresponding risk/reward range empower the advisor-client relationship with stated expectations. Gone are the days of clients and advisors putting their faith in subjective, loosely defined semantics like moderate, conservative, moderately conservative.
Now the advisor-client relationship is empowered by transparent, objective, well-defined, actionable expectations and the probability of success is quantified and unemotional.
Capturing Investor's Risk Number
The Next-Generation Risk Questionnaire, as well as the legacy Simple and Detailed Risk Questionnaire, provide you with the opportunity to discover each client's risk/return preferences. The first few questions are information gather tools, helpful to gain insights into each investor's financial world while setting the stage for the risk/reward questions.
Riskalyze helps advisors understand each client's feelings and biases regarding financial risk in the context of their personal financial position. The questionnaire requires the context of their total investment amount — and in the case of the detailed approach — the amount they would have to lose to reach the state of "financial devastation." From these data points, Riskalyze is able to ask a series of dynamic questions to calculate each investor's monetary utility. Upon completion of a Risk Questionnaire, Riskalyze converts the solution into an understandable and actionable Risk Number.
The ultimate litmus test for the calculated Risk Number and corresponding risk/reward range (see visual above) is the client's gut. Ultimately the client will approve of the calculated risk/reward range and corresponding Risk Number.
Starting the Discussion
The Risk Questionnaire solution allows the advisor to objectively anchor the client to their risk tolerance, but our advisors never blindly follow its results. The questionnaire can open up a wide-ranging discussion of risk and reward, allowing the advisor to adjust from that anchor based on their expertise and experience. Advisors should consider the calculated Risk Number as a foundation for a risk/reward discussion with the investor. Advisors should take all relevant information into account when making portfolio and retirement plan recommendations. For example, just because someone can stomach a lot of risk, doesn't mean that a high-risk portfolio is a correct solution. Advisors will take taxes, age, time horizon, estate planning needs, income needs, etc into account when making recommendations.
Note: As one would expect, answering the Risk Questionnaire using fictitious amounts (for example, using someone else’s financial position or misstating the input amounts) will almost certainly generate an inaccurate outcome. The true outcome of the questionnaire is likely to match the investor’s gut. This fact encourages advisors to incorporate all of the investor's investable assets (uncovering additional investor assets has never been so easy).