Updated Friday, October 31, 2014 as of 3:55 AM ET

New Test for Risk Tolerance

For many years, large financial institutions have designed their own risk assessment tools, while most independent advisors relied on similar tools built into a software package that they had purchased. These tools generally passed SEC and FINRA regulatory muster, but there was always a question as to how useful they were in assessing clients’ risk profiles under real-life conditions.

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Comments (8)
How is this any different from Finametrica? It even has the final question on a the Finametrica assessment asking the participant to score themselves. In addition, the framing of the final report looks much like Finametrica including the assignment of a risk group number.

And do I, as an advisor, "need" to answer these four questions in the affirmative. I almost certainly don't need to answer the cloud based question in the affirmative. That sounds too much like a marketing question and not a question that goes to the heart of dealing with risk assessment and the liability exposure of the firm which apparently the other three questions do address.

Also, I think it would behoove you, Joel, to ascertain whether in fact all risk assessments were invalidated by the 2008-09 downturn. If you had been reading the advisory research press, you would have noted that Finametrica addressed this very same issue in a white paper looking into risk tolerance changes in clients who had taken the Finametrica assessment before the downturn and then after the downturn. Finametrica recruited its advisor base to readminister the tests and submit the results. I am one who did and found as most of us did that the test remained valid.
Please be a little more circumspect when you jump on the latest tech approach to this topic. Be more willing to look further afield and in more depth when making broad assessments concerning what does and does not work. And finally whether some tech startup is truly a game changer with a new widget when that widget was invented years before and quite frankly does a better job.
Posted by MITCHELL K | Monday, May 05 2014 at 1:18PM ET
Joel: I agree with everything that Mitchell K said, and would like to add that Pocket Risk looks like a Finametrica "light" in that there is no way it has the validated testing history that Finametrica does. It simply couldn't it's so new. Also, it costs significantly more than a full subscription to Finametrica. RAP
Posted by Richard P | Monday, May 05 2014 at 2:06PM ET
@Mitchell K - Hi, I am John. The founder of Pocket Risk. Let me address your points above.

Your first question asks how is this different than Finametrica? Well, we asked some of our existing customers who have used Finametrica in the past why they like Pocket Risk. We were told they preferred our questions, ease of use, the ability to white label and the fact you can embed the questionnaire on your website. For these individuals and others the questionnaire and the technology works better for them.

Your second point asks do you "need" to answer all the four points in the affirmative. No you do not but they get to the core of the challenges most advisors have with risk questionnaires.

On your third point Joel does not say "all" risk assessments were invalidated. He said the "vast majority", which matches with what I have been told by advisors. Companies like Finametrica have shown as an industry we can do a better job measuring risk.

Lastly, I'd say Pocket Risk is not just a new widget. If you use the software with some clients, that will be evident. More tools that help advisors do their job can only be good for advisors. As competition increases you are likely to see more innovation which will help you do your job even better.

@ Richard P - Thanks for your comments. I'd disagree with your suggestion that Pocket Risk is a "light" version. I'd encourage you to use it to see how it works. We have customers who have used both products and they wouldn't describe it as such. Lastly, you must have misread/misunderstood Joel's comments. If you go to the Pocket Risk pricing page you will see we are less expensive than Finametrica.
Posted by John N | Monday, May 05 2014 at 4:18PM ET
Joel,

Our subscribers reported smooth sailing through the 2007-2009 bear market. Unlike most advisors, their clients were following strategies that were consistent with their risk tolerance and where they understood the risks in those strategies. While clients were not happy that their portfolios were falling in value they were not unhappy with the advice. There is no shortage of testimonials to this effect at www.riskprofiling.com.

Our system has three components:
-a psychometric test of personal financial risk tolerance,
-a methodology for linking the test results to portfolio risk so that the riskiness in a portfolio can be compared with the client's risk tolerance, and
-unique educational materials about portfolio risk and return that advisors can use to ensure clients have realistic expectations.

Our system is integrated with MoneyGuidePro and FinanceLogix and announcements will be made about integrations with two other financial planning platforms in the near future.

Our system can be white labelled and embedded into the advisor's website.

All the features of Pocket Risk that you liked first appeared in FinaMetrica some years ago. I will register you to do the FinaMetrica test so you can see for yourself.

No other system available in the US market has the testing rigour, track record or features of the FinaMetrica system.

@Mitchell K and @Richard P thanks very much for your positive comments.
Posted by Geoff D | Tuesday, May 06 2014 at 3:58PM ET
Response to John N founder of Pocket Risk:
Let's take these in order:
Point One: Aside from the technology that allows for embedding your questionnaire on a website and that some advisors like your questions better, I still see too much similarity with Finametrica's assessment tool. All of the rest of your response about what you get are also available in Finametrica. What Joel posts as a sample of your summary looks very like Finametrica's summary. Questions can vary but if you come to the same format and structure of Finametrica's summary it seems fair to ask how you are any different.
Point Two: I stand by my comment here without further comment except to question your use of the word and the meaning of "core".
Point Three: Fair point. "Vast Majority" is not the same as "all." Vast Majority does however carry a pretty heavy emphasis with the use of the word "Vast." The implication would be read by most readers as very few escaping this problem. Finametrica did.
Point Four: Since I believe it is still fair to assert that your product is too similar to Finametrica, I would not see the reasoning behind switching to something "new" for the sake of its newness.
Finally, I did not address something which Joel also did not address. The robustness of the data that supports your analysis and recommendations --
something which, I see, Geoff has done. I use Finametrica because it has a huge database of client information related to risk that validates the risk assessment of the client. This validation would be necessary to provide in any litigation related to the congruence of the portfolio with the client's risk assessment.
Simple Question:
What is the size and extent of your database validating your assessment?
Posted by MITCHELL K | Tuesday, May 06 2014 at 5:54PM ET
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