|In recent months we have been asked by a number of advisers what questions might be included in their firm’s assessment of a risk tolerance test. Up front we must admit that we do have a vested interest in the inclusions in such a list. After all we have spent almost twenty years thinking about risk tolerance issues and how best to manage them. So who better to get the ball rolling?|
If you are an adviser, a compliance service provider, a supplier of services to financial advisers, a fund manager or life company (wishing to link risk-rated funds to risk tolerance) and are seeking a robust risk tolerance test your Due Diligence might include the following questions:
- Who designed the test?
- What was their financial services industry experience?
- To what extent does the design of the test and its instructions indicate that the test publisher understands the financial advisory process and how the test results should be incorporated into it?
- What testing discipline was used in the development of the test and who provided the expertise?
- How have the questions being validated as being understandable and answerable and by whom?
- How have the validity and reliability of the test been established and by whom?
- What is the test’s track record? (For how long has it been being used? How many users are there? How many tests have been completed?)
- Does the test have a Technical Manual?
- Do the tests results confirm that risk tolerance is a stable personal trait?
- To what extent have academic researchers used the test?
- Are there any further academic studies using its core data that support the integrity of the test’s results?
- Does the test’s publisher retain the test results for ongoing analysis to ensure quality control?
- Has the test been used in other countries successfully or is it just local?
- If the test is a new test to what extent can it be proved that it will perform satisfactorily?
- Do the test’s instructions discourage adviser coaching?
- To what extent does the test facilitate informed discussion with the client about risk-related issues?
- How effectively can an adviser explain how the test results link to an asset allocation?
- Does the test identify inconsistent answers and do the test’s instructions provide guidance for dealing with those inconsistencies?
- Do the test’s instructions encourage each partner in a marriage take the test separately and explain how to manage mismatches?
- Are there testimonials from leading industry advisers who confirm the value and effectiveness of the test to their business over time?
Advisers need to know that that the tools they use in the giving of advice are fit for purpose. That’s not just common sense; it’s increasingly being enforced by regulation.