Category Archives: Advisor Resources

Why Robust Risk Profile Questionnaires Are Worth 10.8x The Price You Pay

The chart says it all. Click the link to view and enlarge.

Value of Risk Profile Questionnaires

Why You Should (And Shouldn’t) Use A Risk Tolerance Questionnaire

Risk Tolerance Question MarkAll financial advisors collect Know Your Client (KYC) information about their clients. Not only is it a regulatory requirement, it’s good business. It helps you build a winning investment approach by requiring you to collect your clients vitals.

History Of Risk Questionnaires

Unfortunately, as KYC requirements expanded in the 90’s and 2000’s advisors increasingly had to use ineffective, boilerplate risk questionnaires to meet regulatory requirements. A robust and widely available approach did not exist. This gave risk questionnaires a bad reputation. Advisors did not want to use a tool that was ineffective just to please the regulators but they had no choice. It was that, or go out of business.

Due to the forced regulatory antecedents of risk questionnaires some advisors chose to avoid as much as possible. But times have changed and we now have comprehensive risk profile questionnaires that are effective, compliant and measure more than risk tolerance (they can measure risk capacity, and goals). Below I explain why you should use a risk profile questionnaire. However, it wouldn’t be fair to talk about “why you should” without looking at the opposite, “why you shouldn’t”.

Why You Should Use A Risk Questionnaire

1. To Better Understand Your Prospects And Clients, So You Can Recommend Great Investments 

There has been an explosion in psychological and economic research about decision making since the late 90’s, culminating in Daniel Kahneman winning the 2002 Nobel Prize In Economics. This research and others has taught us how people make decisions.

We’ve learnt that people suffer losses more than they enjoy gains or that people have a tendency to follow the crowd and chase returns. This was not widely documented 10 years ago. We can use this information to design a questionnaire that taps into what clients want, need and how they will react during a market correction. This data will help you build a winning investment approach for your clients.

Additionally, one study found that advisors who use traditional conversational interviews to assess risk tolerance are only 40% accurate. 60% of the time, advisors are wrong about their clients’ risk tolerance. As Michael Kitces, the well-known financial planning blogger stated “a well-designed RTQ [risk tolerance questionnaire] is actually far more effective than an advisor’s professional (but highly subjective and potentially-business-model-biased) judgment“.

2. Company Efficiency

Having a standardized process for prospecting, on-boarding new clients and completing annual reviews will save you and your company mountains of time. If your firm uses a paper based questionnaire then going online will make your life incredibly easier.

I was recently speaking to a Pocket Risk customer who said switching to a comprehensive online risk questionnaire saves her company at least a few thousand dollars a year in employee time, filling and mailing costs.

3. Risk Profiling Compliance

The compliance burden for advisors is only going one way. Up! Regulatory agencies in Canada and the UK have become increasingly prescriptive about the need to assess a client’s risk tolerance, risk capacity and goals. The US, Australia and India are not far behind. Furthermore, especially in the U.S., regulators have been increasingly fining firms and expelling individuals for suitability failures. Last year there were $18,300,000 in fines. With the new Department of Labor Fiduciary Rule, more are likely to come for those who fail to accurately assess their clients’ risk profile.

Why You Should Not Use A Risk Questionnaire

Since I considered the argument for using a risk questionnaire, lets consider the reverse. The most common reason for not using a risk questionnaire is fear of documentation.

If you are afraid of documenting your clients’ wishes then it must be because you’re worried facts might be misconstrued and used to file a complaint against your firm. That is a legitimate concern and a valid reason for not using a risk questionnaire. However, we believe the solution to this problem is not to leave a vacuum of information but to…

  1. Only work with clients who demonstrate integrity. Avoid litigious individuals. No matter the facts, certain types of people will always sue you if something goes wrong.
  2. Use documentation to protect you by ensuring there are no “grey areas” to be misconstrued. Get your clients to sign off on your decisions. A vacuum of information leaves more open to debate.
  3. Use tools and services that comply with the letter of the regulations and their spirit.


If a risk questionnaire is effective and compliant then all advisors should use them. Evidence shows that the conversational interviews to assess risk are wrong 60% of the time. So if you want to recommend the best possible investment approach for your prospects and clients, it makes sense to use a comprehensive risk profile questionnaire.

Actions For CFPs® To Build Trust With Clients

CFPThe Certified Financial Planner Board Of Standards’ first principle in its Code of Ethics is integrity. The code states – “Integrity demands honesty and candor which must not be subordinated to personal gain and advantage. Certificants are placed in positions of trust by clients, and the ultimate source of that trust is the certificant’s personal integrity.”

The problem with integrity and trust is that they are nearly impossible to see and measure. As Harry Beckwith noted in “Selling The Invisible”, when you sell an intangible product clients often make choices based on tiny impressions that have little to do with your service.

However, there are visible ways to build trust with prospects and clients. Below are the nine components of convincing people you are trustworthy.

1. Authenticity – Authenticity is communicating in your natural fashion, without corporate speak.

Action Step  – Go thorough all major pieces of material your clients see and edit them to sound like a human being. That includes your website, newsletter and reports. Do not use jargon, keep things simple.

2. Believability – Believability is the client’s perception of your business matching up with your words. If you are a great advisor you should have testimonials, stories and examples of where you have helped people in a similar situation. Public testimonials are prohibited by the regulators but you can use an existing client as a reference.

Action Step  – Ask an existing happy client to act as a reference for prospects.

3. Credibility – Credibility is the quality of being trusted and believed in. This is primarily communicated by credentials such as your CFP®. But it also done by how you look (i.e. how you dress, your office, your experience).

Action Step – Make it clear you are a CFP® on all major communications. Talk about your past experience on your website and get professional pictures taken. Pictures of your office are also a plus. Finally, look the part! Would you trust yourself with a multi-million dollar account?

4. Familiarity  Harry Beckwith makes it clear in his book that “familiarity” is a major factor in client decision making. Familiarity breeds trust because if someone has heard from/about you various times you appear to be a grounded organisation, here to stay. Not fly by night.

Action Step  – Create a monthly newsletter for prospects and clients. Build a list of people who follow your work.

5. Feasibility Of Relationship – You need to be easy to do business with otherwise people will not bother.

Action Step – 1) Publicize your fees and minimums. 2) If you offer a free consultation publicize it and let people know what happens during the meeting. 3) Let people know what is involved in becoming a client.

6. Safety – Make people feel safe doing business with you.

Action Step – Make it clear in your communications that you work with a reputable custodian and/or broker. Talk about your security procedures to protect client information, as well as your disaster recovery plan.

7. Comfort – Once someone becomes a client, they want to feel comfortable doing business with you. If you visit clients at home, let them know. If you can offer great advice without digging into all elements of their life, let them know. People want to feel comfortable.

Action Step – Develop one idea to make your clients feel more comfortable. How can you make the financial planning experience more enjoyable?

8. Superiority – Superiority is appearing greater than the competition. Traditionally, this is done by AUM or number of clients. But you can use credentials, experience or specialization (e.g. only working millennials).

Action Step – List three ways you are superior to your competition and use these to distinguish you from the competition. Include them in your communications. If you are a small firm for example, you can talk about your personalized service.

9. Value – Value is explaining why your service is worth more than the price. This should be relatively easy, especially if use data from the Dalbar studies.

Action Step – Write a short paragraph explaining why your service is good value for money. Use these words with prospects and on your website.


Building trust is not a nebulous process. A clearly defined series of steps as outlined above will demonstrate you are trustworthy and encourage people to work with you. When you appear trustworthy, you will get more clients.

Pocket Risk integrates with Redtail CRM

RedtailPocket Risk has completed an integration with Redtail, the most popular advisor focused CRM (Customer Relationship Management) tool in the market. The integration will allow users of Redtail to launch the Pocket Risk questionnaire from within Redtail and review client scores.

The integration has been completed to make it easier and quicker for advisors who use Redtail to integrate Pocket Risk into their regular practice. With this integration advisors will save valuable time assessing their clients’ risk profile.

You can learn about the integration our dedicated page or watch the video below.

How To Make Robo-Advisors Irrelevant

Blue Ocean StrategyIt’s difficult to pick up an industry publication, attend a conference or speak to a fellow advisor without discussing the threat of robo-advisors. There is no doubt they will change our industry forever but what is the solution for the financial advisor?

Over the last week I’ve been reading Blue Ocean Strategy: How To Create Uncontested Market Space And Make The Competition Irrelevant. The book offers a framework to deal with competition. A series of steps that go beyond differentiation or cost cutting, the typical response to competitive threats. The main arc of the book is that to defeat your competition you must make them irrelevant typically by appealing to a new customer segment.

Through a process called value innovation it is possible to create a business that is cheaper (either for you to produce or the consumer to buy) and better.  The classic example is Cirque Du Soleil who created a brand new market with their artistic and theatrical circus performances a world away from tents, lions, ringmasters and deadpan humor.

So how can we apply value innovation to financial advice? The first step is to understand the criteria under which people buy financial advice and who are the competitors.  Here is my list….

Criteria for Buying Financial Advice

Price / Fees – How much does it cost?

Performance – Will I make money?

Ease – Is the process easy to buy and manage?

Trust / Relationship – Can I trust the service/person and build a relationship?

Time – How long does it take to start and finish?

Goals – Will I have a set of goals and a plan I can believe in?

Education – Will I be more financially astute?

Personalization – How personalized is the service?

Competitors Offering Financial Advice

Financial Advisors  – In all their shapes and sizes

Robo-Advisors – Wealthfront, Betterment, etc

Family and Friends

Do It Yourself

Plotting The Competitors 

Using my judgment I’ve plotted the relative performance of different competitors in each area. For example, robo-advisors are cheap compared to the average financial advisor but they do not offer much in terms of personalization.

Comparing Sources of Financial Advice

The point of the exercise is not to be 10 in everything. That is nearly impossible.  The point is to find uncontested market space. So what opportunities exist for financial advisors given the current situation? The evidence would seem to suggest that advisors should not manage money directly.

As you can see from the chart above, the average financial advisor is great at goal setting, education, personalization but score poorly in fees and investment performance. Obviously there are advisors that perform well for their clients but the general perception is that fees erode performance. A solution to combat the threat of robo-advisors is not to manage money at all. Either outsource it to a robo-advisor, an inexpensive 3rd party money manager or become a coach and encourage clients to do their own buying and selling.

There is no advantage in offering a broadly diversified passive portfolio. As Michael Kitces says “Building a well-diversified passive strategic portfolio is on its way to being totally commoditized“. A less revolutionary approach to ridding yourself of money management has been advocated by people such as Deborah Fox of Fox Financial Planning Network, who suggests that a two tier service level could be the best approach for advisors. For some, even this is drastic.

The Blue Ocean Strategy offers other suggestions for advisors. For example, selling your skills to a new industry e.g. Employer retirement plans, institutions or getting into business planning. There is also the option to cut across client groups e.g. (Having a price point between robos and existing advisors and simply providing online advice).

 What would I do if I were a new financial advisor?

I like to think what would I do if I were a brand new financial advisor (admittedly an easier situation than converting an existing business). I suspect I would probably partner with a robo-advisor to do the investment management, provide online financial advice (so I could be nationwide) and focus on a particular sort of client base (e.g. entrepreneurs, doctors, lawyers, people 50-55).

There is a gap in the market between robos and traditional advice. Vanguard and Personal Capital have attempted to enter it with their hybrid model and I believe they will be successful. Therefore an advisor will need a specialism (e.g. doctors, military personnel etc) where Vanguard can’t compete because of their scale. You can charge more than Vanguard (whose fees start at $300 a year) and anchor your pricing next to something that has nothing to do with financial advice but people pay a lot more for e.g cable tv.

You are probably thinking this doesn’t sound like a very scalable business. I disagree by attracting clients who have never bought financial advice I believe it would be possible to create a profitable sustainable business (though it may very well be smaller than what you have today). Walmart is not the only food retailer (just look at Whole Foods) and therefore Wealthfront or Vanguard don’t have to be the only people selling financial advice.

In the long run (10+ years) I can’t help but see financial advice being broken into three categories. Swiss style white glove service for multi millionaires, primarily online hybrid services, and do it yourself robo-advisors. I believe the best bet for advisors is to offer a hybrid service. It’s the only relatively uncontested market place that exists.