Author Archives: John Ndege

About John Ndege

Founder and CEO of Pocketrisk.com. Risk Profiling software For Financial Advisors.

You’re Using Your Risk Tolerance Questionnaire Wrong

Risk Tolerance QuestionnaireMost risk tolerance questionnaires get a bad rap. For many advisers, they are simply a compliance tool to appease the regulator. They add some value, but if it weren’t mandated, they probably wouldn’t use them. This negative mindset is rightly deserved due to the abusive use of risk questionnaires. Let’s get a few things straight…

  1. Risk questionnaires cannot tell you exactly how to invest.
  2. Risk questionnaires cannot cover the entire suitability process.
  3. Risk questionnaires cannot solely be used for prospecting.

The true purpose of a risk questionnaire is to help you know your client so you ask intelligent questions and recommend the best investments. Knowing your client entails understanding their goals, psychological risk tolerance, capacity for loss and behavioral biases. You cannot capture all of this in a questionnaire.

Investing should be goals driven but instead it’s compliance driven

Risk questionnaires should help you recommend investments and handhold clients during market ups and downs. Not prescribe allocations and securities. The FCA hinted this in their Financial Advice Market review published in March. A questionnaire cannot challenge a client’s misunderstandings or mistakes. This is what being an adviser is all about. Only you can do this.

The regulator has attempted to legislate trust between you and your clients but we know that’s impossible. It has resulted in the bizarre outcome where people are invested according to “what would pass an audit” instead of their long-term goals.

So what’s the solution? It’s twofold.

  1. Ultimately, the financial advice market will need to increase its standing in society so it has more trust and less need for regulation. Perhaps the greatest trust builder being increased education and professionalism across the ranks (which is happening). At the beginning of the last century medical doctors were widely decried for their quack cures and empty promises. A few decades later they were the most esteemed profession in the country. This can happen with financial advisers.
  1. On the risk tolerance questionnaire side, you should be ready to challenge the results of a risk questionnaire if it suits your clients’ greater long-term interest. Human judgment shouldn’t be completely dismissed. It just needs to be thought through and documented. Admittedly, going through a detailed question and answer session with a client is less efficient than a questionnaire but it will help you learn about your client’s overall profile in a way a risk questionnaire cannot.

As someone who leads a company that creates a risk tolerance questionnaire for advisers you might think it odd that I call out the limitations. On the contrary, I think this draws to attention the qualities and uses of an effective questionnaire. It should help you understand a client’s goals, psychological risk tolerance, capacity for loss and behavioral biases so you can ask intelligent questions and guide clients towards their goals. It should act as a client-friendly, 3rd party check in your process to ensure you don’t succumb to your own behavioral biases. Does your risk tolerance questionnaire do this?

Technology Does Not Replace The Advice And Direction Of An Advisor – Tony Leal – President, MoneyGuidePro #FearlessFinancialAdvisorPodcast

Tony LeadA discussion with Tony Leal, President and CTO of PIEtech/MoneyGuidePro on the future of technology in financial planning. MoneyGuidePro is recognised as the most popular financial planning software in the U.S. It’s software is used by independent solo advisors all the way up to Schwab. As leaders in the industry their developments are watched by thousands of advisors and firms.

Listen to the interview below.

In This Interview We Discuss…

0:25 – MoneyGuidePro has been around for about 17 years, what’s the vision for the years to come?

01:25 – Are you serving advisors or end clients?

02:05 – How do you see the financial planning process changing due to technologies like MoneyGuidePro?

03:20 – What is myMoneyGuide? Why is it important?

05:20 – What are your thoughts on robo-advisors? How do you see MoneyGuidePro helping advisors as they are challenged by new technology?

09:12 – What advice would you give to small advisory firms given what you see in the industry.

12:10 – What differentiates the top/best performing advisors from the rest?

13:33 – What advice would you give to your 30 year old?

Resources

Learn more about Tony Leal

Interview MP3

Is There Money To Be Made Serving Younger Clients? #FearlessFinancialAdvisorPodcast

A topic near and dear to our hearts. How to profitably serve millennial clients. In this video I am speaking with Alan Moore MS, CFP®, Co-founder at XY Planning Network. XY Planning Network is the leading organization of fee-only financial advisors who specialize in working with Gen X and Gen Y clients. They offer comprehensive resources to help financial planners run better and more successful businesses.

In This Interview We Discuss…

0:23 – What is XY Planning Network?

01:32 – Is there a market to serve younger clients?

03:41 – Is there money to be made serving younger clients?

06:25 – What fee structure works best for younger clients?

07:42 – How to attract younger clients

10:25 – Does investment management matter to younger clients?

13:45 – CFP Curriculum

14:53 – What is the best way to serve younger clients?

17:13 – Is it too much work serving younger clients?

18:14 – Trust and client acquisition costs

23:21 – What advice would you give to your younger self?

Resources

Alan Moore XYLearn more about Alan Moore

Interview MP3

[Introducing Pocket Risk 2] Why Risk Tolerance Questionnaires Should Not Be Used For Prospecting

In recent years there has been a plethora of risk tolerance tools releasing features to help advisors acquire more clients. The theory goes by assessing a client’s risk tolerance we can know what investments best suit their psychology, a portfolio they will “stick with”.

However, this contradicts the true purpose of a financial advisor, which is to help clients achieve their long-term financial goals. Simply investing along the lines of someone’s psychology could result in a plan that has too little risk or too much.

The Customer Acquisition Challenge

Advisors like these customer acquisition features because they believe it will bring in more clients. But the real customer acquisition cure for advisors is not better technology but more trust and awareness. See research and commentary here and here.

The primary purpose of a risk questionnaire is to educate an advisor about a client’s risk tolerance, risk capacity and risk needs (goals). With this information an advisor can build a plan likely to hit the goal, without the client bailing out midway. A client’s psychology should not be ignored but it should definitely not be the main driver of a plan.

Jumping from risk tolerance to investment portfolios without adequate consideration for goals and risk capacity is a recipe for short-term satisfaction and long-term dissatisfaction.

Introducing Pocket Risk 2

Every week, advisors ask us to build more and more “customer acquisition” features. It’s tempting since, we want to make money but it doesn’t feel like the right thing in the long run. The right thing is a tool to educate advisors and clients that promotes good behavior. Since behavior is the primary determinant of investor returns.

We have released a new risk questionnaire that assesses goals, risk tolerance and risk capacity so advisors can collect the information they need to build a plan that works in the long-run.

Our new feature set is about enhancing the financial planning differentiation advisors have today against robo-advisors rather than trying to compete in commoditized investment management technology. The advisory customer acquisition challenge will be won in personalized financial planning, where robo-advisors cannot easily compete.

Click here to take the risk questionnaire

 risk tolerance questionnaire

How RIAs Should Prepare For The DOL Fiduciary Rule – Interview with Cathy Vasilev #FearlessFinancialAdvisorPodcast

A compliance focused interview with Cathy Vasilev on how financial advisors can better manage the changing compliance landscape. Cathy Vasilev is a founder and VP of Red Oak Compliance. She’s been working with RIAs and BDs for over 25 years and has considerable experience helping firms stay compliant.

In This Interview We Discuss…

0:37 – What is the biggest compliance issue facing RIAs and BDs at the moment?

02:12 – What are the main compliance requirements of setting up your own robo-advisor?

05:28 – Impact of DOL fiduciary rule on RIAs

08:00 – The first thing RIAs should do to get a handle on the fiduciary rule

11:10 – Common compliance mistakes

13:15 – Is compliance enforcement going up or down?

14:25 – How to use compliance to grow your business

16:05 – What advice would Cathy Vasilev give to his 30 year old self?

Resources

Pocket Risk Cathy VasilevLearn more about Cathy Vasilev

Interview MP3