In This Article:
Know which questionnaire approach fits your style, clientele, and company brand.
- Next-Gen Risk Assessment - Our latest questionnaire is a “best of both worlds” (Simple and Detailed) approach, which marries the rigor and sophistication of the detailed approach with the simplicity and ease-of-use that comes with using the simple approach. The next-gen risk assessment is perfect for facilitating meaningful conversations with your clients around risk/reward trade-offs, but enhanced visuals throughout make it highly distributable for clients taking it on their own.
- (Legacy) Simple Risk Assessment – The Simple Approach questionnaire was built at the request of advisors looking for an option for elderly clients, clients with limited time, or clients with limited/unknown technical sophistication. Many advisors use the Simple Approach as an introduction to their management style and dive deeper via a discussion or completion of the detailed approach, as needed. The simple version is the most often emailed approach.
- (Legacy) Detailed Risk Assessment – The detailed approach is the most analytically robust and mathematically sound questionnaire available today. Our advisors love walking clients through the detailed approach in a face-to-face meeting, so they can understand the logic behind their answers. During the process, an advisor will often learn whether the client is focused more on risk OR potential return, what lifestyle changes they think through as the odds change (if X happened we couldn’t send Johnny to college, or we would have to sell the vacation home, etc.).
- Set Manually – This approach is best when you already know the risk tolerance of the client from a discussion, or you're setting a Risk Number® as a goal.
Discussion Points with Clients
- Discussing Risk and Reward with Clients
- Being able to have conversations about risks and rewards with clients can be difficult, but it’s incredibly important. Some clients are more open to having that conversation than others. Clearly demonstrating that you can align a client’s portfolio with their Risk Number and comfort zone is a crucial step in building up that client’s confidence and trust in you as their advisor.
- Use terms like "comfort zone."
- “Mrs. Client, let’s talk about your comfort zone. For discussion purposes with your $150,000 portfolio, let's assume that over the next 6 months, your portfolio could drop by as much as $10,428 (7%) or gain as much as $16,803 (11%). With those numbers as your guardrails, would you be able to stay invested? Is that 'best case' return high enough? Would you be comfortable with a 6-month outcome somewhere between those numbers?”
- Discuss the Risk Number in the context of their comfort zone.
- “Mr. Client, your Risk Number means you are comfortable risking X% for a chance to earn Y%. The higher your Risk Number, the higher the risk and potential return.”
- Use analogies when discussing the Risk Number.
- “Mrs. Client, your Risk Number is like a speed limit. Some are comfortable driving 95 MPH and others not a hair over 45 MPH. Of course, just because you feel comfortable driving 95 MPH in normal conditions doesn’t mean you should drive at top speed regardless of conditions. It is my job to help determine your comfort zone in the context of your goals and risk tolerance.”
- Use meaningful dollar amounts.
- The Investment Amount must be a meaningful amount of money to the client. If someone with a $2 million net worth uses $10,000 as an investment amount, they’re guaranteed to receive an inaccurate result from the questionnaire. Using a meaningful dollar amount in any Riskalyze questionnaire promotes true-to-life tradeoffs and hypotheticals that challenge a person’s decision-making. The goal here is to promote a meaningful conversation and some real soul-searching for the client. An inaccurate investment amount will lead to the opposite, and ultimately, an inaccurate result.
- If using the Detailed approach, the Devastation Amount is equally important. This is the number that would be completely unacceptable, and devastating, for a client to lose. An “acceptable loss” will not do. The amount is so devastating that, if they reached this point, they would have to take painful or unexpected actions, such as radically altering their monthly spending, reducing their housing costs, or selling major belongings because they feel like their portfolio has little chance to recover.
- Most clients innately understand their devastation amount, but a few may struggle to define it. One advisor suggested this simple question: “How far would your portfolio have to fall before you’d fire me as your advisor?” That may be a good starting point for devastation if your client struggles with the concept.
- Resist the urge to answer for the client.
- When an advisor is helping a client answer the questionnaire, provide solid guidance, but resist the urge to answer for the client.
- An advisor might reframe the question like this: “So, would you take a sure return of 5%, or would you put Suzie’s college fund on the line for a 50/50 chance of paying off your mortgage?” The advisor should fight the urge to recommend which course of action would be best.
- Increase your waiting room productivity.
- Have a tablet opened to a questionnaire and present it to your prospects and clients before your meeting while they sit in the waiting room. Their number will instantly load into the advisor’s Riskalyze account to examine with the client.
- Work the questionnaire into your office workflow.
- Email the questionnaire link in an appointment confirmation email
- Make completion of the questionnaire a part of your annual review appointment
- Use a client's birthday as a reminder to complete the questionnaire
- Embed the Lead Generation Questionnaire into your website
- Take an iPad or tablet to client meetings (coffee shop, client’s home, etc.)
Frequently Asked Questions
- What determines the Risk Target Number?
- Riskalyze optimizes a sample portfolio behind the scenes using equity, fixed income and cash allocations. For example, a 6-month range of -10% to +15% might be the product of a 55% equity, 5 % cash, 40% fixed income allocation as optimized in a sample portfolio.
- How should I handle a client with multiple accounts and different objectives?
- If your philosophy follows the "buckets of money" approach, then you can easily send out a Risk Questionnaire specifically to address your client's risk associated with each account and unique investment objective. This is great for that client with a retirement fund, boat fund, and beach house fund.
- What about spouses, couples, trustees? Everyone has a unique Risk Fingerprint, so how do you account for accounts with multiple decision-makers/owners?
- Riskalyze provides the ability for you as an advisor to obtain the Risk Number for many different scenarios. You can capture the Risk Number of a household (husband and wife) independently so you know how they both feel about risk. More on capturing the Risk Number of a household HERE.
- If you work with Investment Committees or non-profit endowments, the Risk Questionnaire allows you to capture as many Risk Numbers as necessary.
- What if the questionnaire results “feel” wrong?
- Use the results of the questionnaire as a catalyst for a risk/return discussion. Discuss and confirm a Risk Number and six-month probability range with the investor. The questionnaire is a reason to have a documented risk/reward talk.
- Remember that for an investor to complete a questionnaire they must approve and accept the results. This helps them be a part of the portfolio decision, rather than leaving it solely on your shoulders.
- Why did my client have such a high-Risk Number?
- It could be that the investment amount that is being assessed is actually a trivial amount of money to that individual. We see this when someone with a $10 million net worth assesses a $10,000 portfolio. Or when someone with a guaranteed pension is assessing a $1,000 IRA.
- If the investment amount is definitely meaningful to the individual, the culprit is likely the devastation amount being too high — effectively, an amount of loss that is acceptable to the investor (as opposed to devastating). Keep in mind the technical definition of financial devastation: “the amount where the investor feels they will have to take painful and unexpected action, as it is highly likely their finances will never have a chance to recover.”
- Finally, remember that some clients simply have a very high-risk tolerance. That doesn’t necessarily mean that they should take that much risk! Utilize retirement maps to illustrate how the investor can be just fine staying with a lower number and does not need to take on unnecessary risk in order to meet their long term goals.
- What if I have a poor completion rate when I send out questionnaires?
- “What is your comfort zone [Risk Number, risk tolerance, etc.]. Complete this Risk Questionnaire below to help us figure that out!”
- “It is imperative that I have you complete the risk questionnaire below by next week on Friday, so I can perform your portfolio analysis.”
- “I take your investments as seriously as you do, so please complete the risk questionnaire below by Tuesday at the close of business.”
- “Complete the questionnaire below before our appointment on Wednesday afternoon, so I can be prepared."
- Most advisors will request that all “decision-makers” on the account review, discuss and complete the questionnaire together for a unified view of the group’s risk tolerance for the funds in question. Many advisors will also request that each individual complete a questionnaire to help them identify and document which “decision-makers” are most and least risk-seeking.
- In some cases, depending on marriage dynamics, an advisor may have the owner of each account complete a questionnaire. For example, for a husband and wife that own two IRAs and a trust account, the advisor might have three questionnaires completed: one for his IRA, one for her IRA, and a joint questionnaire for the trust. This also offers additional insight into their client's decision-making process.
- Consider changing the text in your email to clients. Make sure they see the value to them in completing the questionnaire. Give them a deadline and stress the importance.
- How often should investors complete a questionnaire?
- At least annually, and whenever there is a significant change to the investor’s finances (change/loss of job, inheritance, divorce, lottery winnings, etc.).
- Volatile markets may constitute another reason for updating an investor’s questionnaire. It's important to stay ahead of and manage a client's expectations.