There is nothing more critical to the accuracy and effectiveness of a Riskalyze risk questionnaire than capturing accurate and “real” dollar amounts for the “Investment Amount” and the “Devastation Amount.” Completing a questionnaire in “someone else’s shoes” simply does not work.
- Investment Amount
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, it’s almost guaranteed that they will score a 90 to 99 on the risk questionnaire.
- Devastation Amount
The Devastation Amount is equally important. This is the number that, if the client’s investments fell to this amount, it would be completely unacceptable and utterly devastating to them. 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 moving in with their parents or their kids, 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 nothing else.)
- Real Consequences and Trade-Offs
Establishing accurate dollar amounts ensures that each question will incorporate real consequences and tradeoffs to the client — both good and bad. “If I take that risk and fail, that will mean no college for Suzie.” Or “If I take that risk and succeed that means I could pay off the house early.” Or “I would take a sure thing over being forced to move in with my in-laws.”
These are the types of trade-offs and soul searching each question should inspire. As you can see, if the amounts in question are not relevant, the answers simply won’t translate into meaningful data.
- Providing Guidance
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.
Ultimately, the goal is to understand the client’s threshold for pain, so we can build a portfolio unlikely to trigger the “rip cord” mentality when markets are pulling back. Using real and relevant dollar amounts in the questionnaire are the key to achieving that goal.
PRO TIP: The most successful advisors understand the methodology behind the questionnaire and guide their clients through it. Check out our Riskalyze Academy Lesson on Guiding a Client Through the Detailed Questionnaire for an interactive tour!