Goals-Based Planning: The Trade-off Between Risk Tolerance and Risk Required

The FinaMetrica Risk Profiling system comprises:  A psychometric test of personal financial risk tolerance.  Educational materials to assist advisers in managing a client's risk and    return expectations in the context of the client's specific risk tolerance.  One methodology for incorporating test results into the financial    planning process. FinaMetrica may be used individually or collectively as an educational tool, a marketing and sales tool and a tool for making trade-off decisions.

Resolving Conflicting Goals

The process of personal financial planning invariably involves helping your client manage one or more conflicting alternatives through trade-off decisions that best meet their present and future wants and needs in their current and anticipated circumstances.

Effective trade-off decisions can only be made when the elements of the trade-off have been separated, and can be clearly understood and compared. A key trade-off decision for your client is between their financial risk tolerance and the financial risk required to achieve goals.

When exploring investment strategy alternatives, the financial risk associated with the return required to achieve your client's goals often exceeds the level of risk which your client would prefer.

FinaMetrica provides a scientifically validated technique for assessing financial risk tolerance and an easily understood methodology for incorporating the assessment into the financial planning process.

Specifically, FinaMetrica provides an 'apples-to-apples' comparison between risk tolerance and investment risk, enabling you to help your client make properly informed risk/return trade-off decisions, because the elements are separate, understandable and comparable.

Importantly, if in order to achieve their goals, your client decides to take more risk than they would normally choose, the FinaMetrica methodology makes this decision clear and explicit – and your client signs-off on it. FinaMetrica enables you to obtain your client's properly informed commitment to the risk/return trade-offs in their plan ... in a jargon-free, plain-English process that clients find enjoyable and informative.

In the past, risk profiling has largely been seen as a necessary evil – just another part of the fact-finding drudgery which neither client nor adviser enjoyed; something to be disposed of as fast as compliance would allow. Some advisers became dissatisfied with this, sensing that it was questionable but not knowing how it could be done better.

The FinaMetrica system can be seen as simply a robust, defensible technique for dealing with that necessary evil … but this would mean missing out on most of the unique benefits which FinaMetrica delivers.

• FinaMetrica users have built successful marketing campaigns on the offer of an obviously more robust and meaningful process for understanding clients’ risk tolerance than their competitors.
• The obvious quality of the FinaMetrica system builds trust. The interviewing techniques outlined in the FinaMetrica training materials when applied to the information-rich FinaMetrica risk profile report lead to an in-depth understanding of and empathy towards clients.
• Experienced users report that they invariably discover valuable information about the client which otherwise they would not have. They find that FinaMetrica accelerates the relationship-building process generally, and particularly with couples, where risk tolerance differences are common.
• With goals based planning, clients arrive at an agreed plan in a manner where any trade-offs have been clearly identified. As a result, clients are able to give properly informed commitment to the agreed plan. They better understand and are more committed to the plan and have much greater ownership of it.
• Properly informed commitment reduces the incidence of client complaints. The plain-English, scientifically-backed, fully transparent and auditable FinaMetrica process is defensible, in the unlikely event that defence is necessary.
• FinaMetrica users see value added to their bottom line in a market where business buyers are seeking process-driven practices with minimal potential for contingent liabilities.

For a complete list of benefits for advisers and others – see FinaMetrica's Benefits

For a complete description of the FinaMetrica psychometric test – see FinaMetrica Technical Manual.

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The FinaMetrica Risk Profiling System
Professional Advisers Obligations in Relation to Risk Profiling
Psychometric Standards for Risk Tolerance Testing
Our Benefits
Frequently Asked Questions