Category Archives: Questionnaire

[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

3 Uncommon Questions To Assess Your Clients’ Risk Profile

RiskIn Harold Evensky’s “The New Wealth Management” risk is described as a “four-letter word” and that echoes many of the discussions I have had with advisors. Again and again I ask myself how do we get a better grip on what Evensky calls “a client’s most restrictive investment constraint”?

Traditionally, advisors tried to figure it out alone, and then they used boilerplate risk questionnaires before adopting academically backed tools like Pocket Risk. However, the journey is not complete. I believe we can further this field by encouraging advisors to share how they tackle risk with their clients. This will allow everyone to develop best practices for tools, processes and questions. Let’s call it a crowd-sourced approach to good ideas about risk.

At Pocket Risk we allow advisors to add a few questions to our questionnaire so they can specifically target a particular concern about goals and risk. This has led to a gamut of questions we believe other advisors can benefit from. Below is a selection of questions as well as an explanation as to why they have been asked.

Question 1: How often do you watch or read financial news media (e.g. CNBC, Bloomberg, WSJ etc.)?

Possible Answers: Daily, Weekly, Monthly, Quarterly, Yearly, Never

Why: The advisor who created this question jokingly referred to this as his most important question. He says clients that watch financial news media on a daily basis (especially programs like Mad Money) will likely be too reactionary when the markets move up and down. Their desire to move in and out of investments at a rapid pace would hurt their future returns and reduce the chances of meeting their financial goal.

As a result he knows he has to work harder with such clients as they are slowly weaned off news media. The risk the advisor is looking to mitigate is the chance that this client is a trader who wants to speculate more than invest.

Question 2: Who is responsible for determining a suitable level of risk, and managing that risk on all of your accounts?

Possible Answers: It is my responsibility, It is the financial professional’s responsibility, It is a shared responsibility, I’m not sure

Why: I like this question. This firm is asking the client’s perspective on who is responsible for the risk in the account. This is isn’t about abdicating responsibility but about optimizing client communication and delivering the appropriate investment approaches.  If the client says they believe the advisor is fully responsible then this can help the advisor craft a relationship and portfolio that better suits the client. Alternatively, if the client believes they are fully responsible for the risk then the advisor may be able to provide the client a larger array of risk options and communicate with them in a different fashion. It’s all about optimizing communication about risk so the client has the appropriate portfolio.

Question 3: What is your life expectancy?

Possible Answers: 18-125

Why: This advisory firm asks their clients how long they expect to live. Rather than guess based on their age, they have used a simple life expectancy test to get an accurate reading based on a client’s health profile. One of the biggest risks investors face is running out of money in retirement. This can be partly avoided by having a realistic life expectation.


You can ask your clients a myriad of great questions about risk but not all of them fit nicely into a risk questionnaire. As a result it’s important to think what else can you ask to better understand your clients’ risk profile. I hope I’ve given you some ideas based on the questions above.

Share the questions you ask your client’s about risk below in the comments.

3 Important Academic Studies About Risk Tolerance

Risk DiceUnderstanding risk tolerance should not be a guessing game especially when dozens of academic studies can point us in the right direction. Below is a list of important academic studies in the field of risk tolerance.

Financial risk tolerance revisited: the development of a risk assessment instrument  – John Grable and Ruth Lytton – 1999

Perhaps the most important paper on devising a risk tolerance questionnaire. Dr Grable and Dr Lytton bring scientific validation to the risk questionnaire through the use of validity and reliability testing. 

Link to paper

Measuring the Perception of Financial Risk Tolerance: A Tale of Two Measures – John Gilliam, Swarn Chatterjee and John Grable – 2010

This study compares the explanatory power of a simple question about risk versus a multi-dimensional 13-item questionnaire when trying to understand someone’s risk tolerance. Unsurprisingly the multi-dimensional questionnaire showed better results. The research helps explain why advisors should not be using boilerplate questionnaires.

Link to paper

Insights from Psychology and Psychometrics on Measuring Risk Tolerance – Michael Roszkowski, Geoff Davey, John Grable – 2005

This paper re-enforces previous studies that show risk tolerance can be measured as long as the questionnaire is long enough and asks good questions (doesn’t mix in questions about risk capacity and risk needs).

Link to paper

If you want to know more about the academic study of risk tolerance please add a comment.

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Morningstar Risk Tolerance Questionnaire – The Good and the Bad

Morningstar LogoThere are many risk questionnaires used by financial advisors and the most common appear to be bundled in with software an advisor is already using. Morningstar is a popular tool used by financial advisors for investment research and financial planning. I often get asked my opinion on the Morningstar risk tolerance questionnaire. So today, I am taking a deeper look at the good and the bad.

Click here to get the Morningstar Risk Questionnaire pdf

Morningstar Risk Questionnaire – Time Horizon

Morningstar 1

The Good

  • The good thing about the time horizon section is that the questionnaire is attempting to establish some sort of goal for the client by asking about their age and when they expect to start drawing income. That being said this is supposed to be a risk tolerance questionnaire not a collection of goals. How much risk someone is willing to take is not the only factor in determining someone’s goals. You also have to look at their needs and risk capacity.

The Bad

  • Age in itself is not a clear indicator of risk tolerance. It’s possible that someone who is older than 75 has a higher risk tolerance than someone who is less than 45.  There is dangerous assumption in the question that to be older is to be more conservative. This is not necessarily true and can result in younger people having overly aggressive portfolios and older people having portfolios that are too conservative.
  • The second question assumes the client wants to draw income. Again this is an assumption that may not be true for all clients. That being said most clients of financial advisors are looking to draw income at some stage so I think this question is fair.

Morningstar Risk Questionnaire – Long Term Goals and Expectations

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The Good

  • Again there is an emphasis on the client’s goals, which is good to know but I am left wondering if this is the right place to ask such a question. Are we trying to establish someone’s risk tolerance or their goals? These two factors often conflict.
  • Question five is interesting and speaks well to understanding a client’s expectations.

The Bad

  • Question three is ok but I wonder if the question covers all the goals a client could have. For example, a client could have different goals for different buckets of money. Or maybe they just want to meet their retirement needs but they have no idea if this requires aggressive growth or “to grow with caution”.
  • Question four is challenging because of the use of “normal market conditions”. What is normal? Is this the last year? 10 years? 50 years. Other than that, I like the answer options.

Morningstar Risk Questionnaire – Short Term Risk Attitudes

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The Good

  • I like question 7. Again, seeing how a client feels in the short run helps an advisor manage expectations.  The specificity of the third answer option (10%) makes it clear what type of loss we are talking about.

The Bad

  • Question six starts off good. I like the question. However, the answer options are too vague.  Someone may be comfortable with a “small loss” but what is a “small loss”? 1% 10%, 15% or more? It is unclear from the options resulting in the advisor having to make an assumption.


The Good

  • The questionnaire makes a decent effort at understanding client expectations and there is a fair attempt at understanding their goals.

The Bad

  • Frankly, this doesn’t appear to be a risk tolerance questionnaire it’s more of a hodgepodge of questions designed to understand the very basics about a client and it struggles to do that conclusively.
  • Too few questions. It’s unlikely that someone’s investing future can be determined by 7 questions.  There’s just not enough detail to make the final result reliable.
  • Where have these questions come from? Was there any science or academic research behind its development? Without this its accuracy can and will be questioned.

For those advisors who wish to go deeper with their clients and have a thorough understanding of their risk tolerance I would be a little cautious about the Morningstar risk questionnaire.  It’s basic and you would most likely need to ask many face-to-face questions on top to learn more about your client.

Educate Your Clients About Risk. Free 6-Part Email Course.

How well do your clients understand risk? How well do you communicate with them about it? Get our free actionable 6-part email course on educating your clients about risk – based off interviews with 126 advisors.

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A Response: A Better Way To Measure Risk Tolerance

Joseph TomlinsonI recently read an excellent article by Joe Tomlinson of Tomlinson Financial Planning titled “A Better Way To Measure Risk Tolerance”. The article criticizes some of the existing risk tolerance questionnaires that financial advisors use. However, unlike most critiques he actually gave suggestions of how the industry can move forward. Specifically he stated questionnaires need to “anticipate how the client will react emotionally to the inevitable stresses that occur in the course of all financial plans“.

While building Pocket Risk I’ve spoken to 78 financial advisors across the country and the most common demand regarding risk tolerance questionnaires was the ability to understand how a client would react during a downturn. I heard innumerable stories of clients who seemingly had a high risk tolerance before the financial crisis but bailed when things got tough. Advisors want to anticipate the behavior of their clients so they can coach them and recommend  appropriate portfolios.

Below is a look at Joe’s criticisms and how we have addressed them in the Pocket Risk questionnaire.


Joe talks about the importance of emotion in financial decision making and how the person going through a downturn could be completely different from the cold and “rational” individual who completed the questionnaire in the past. A Dr Jekyll and Mr Hyde effect.

In our questionnaire we’ve tried to stimulate emotion in a number of ways. For example in question #3 below…

QUESTION: In 2008 the U.S. stock market dropped by approximately 37%. This meant that $100,000 invested in the U.S. stock market at the beginning of 2008 was worth $63,000 at the end of 2008.

If a similar event were to occur again in your lifetime, what would you do with your investment? 

POSSIBLE ANSWERS: I would sell my entire investment, I would significantly decrease my investment, I would slightly decrease my investment, I would neither buy nor sell, I would slightly increase my investment investment, I would significantly increase my investment, I would double my investment.

What we are doing here to stimulate emotion is to talk about dollar amounts not just cold percentages. Additionally, the 2008 crisis is an emotional event for many  in the recent past and we are attempting to stir emotions as they answer this question. It would not have the same effect if we talked about the crash of 1929. Perhaps we could have done more by asking people what they actually did in 2008 but not everyone was invested in the market so that question would not apply to everyone.

Loss Aversion

In his article Joe cites research from Michael Finke and how loss aversion can be a good predictor of a client’s risk tolerance. In Joe’s words “Respondents who tended to focus more on potential losses rather than potential gains from taking investment risk showed more propensity to bail out in down markets.” At Pocket Risk we agree with this analysis and thus included the following question…

QUESTION: I am more concerned with maximizing returns than minimizing losses.

POSSIBLE ANSWERS: Strongly Agree, Agree, Somewhat Agree, Undecided, Somewhat Disagree, Disagree, Strongly Disagree 

As you can see it gets right to the heart of the issue of whether a client is more interested in gains or avoiding losses. We also include a question regarding a client’s wishes to keep up with inflation or surpass it.

Stock Market Believers

Joe moves on to talk about the experience he had with his clients and how the  those “whose confidence was rooted in the belief that the stock market would be a good investment over the long term and that losses would typically set the stage for later gains were mostly able to weather the storms“. Again we’ve tried find these individuals through a number of questions. Here is an example…

QUESTION: It is possible for some investments to undergo long periods of underperformance. For example, the average annual return for the U.S. stock market between 2001 and 2010 was approximately 2.2%, including dividends. The average annual return for the U.S. stock market between 1950 and 2000 was approximately 14.4%, including dividends.

To what extent do you agree with the statement “I am willing to maintain my investment during long periods of underperformance.”

POSSIBLE ANSWERS: Strongly Agree, Agree, Somewhat Agree, Undecided, Somewhat Disagree, Disagree, Strongly Disagree.

The 2.2% return from 2001 to 2010 was abysmal. The the majority of people who would continue to stay the course during such a period of underperformance are most likely to be stock market believers. When we tested this question with a sample of Americans we found it to be a good predictor of risk tolerance.

Other Points

At various points throughout the article Joe makes some important observations. Such as how an IPS (Investment Policy Statement) can help clients through downturns or how new applications of brain science can improve the level of questioning. He then goes on to make a very important point that risk tolerance and risk capacity are different constructs and should not be muddled into one approach. We totally agree. Our focus is on risk tolerance and we believe our tool solves many of the problems Joe outlined in his article.