When Average Isn't So Average

When Average Isn't So Average

I had a very interesting experience this morning. Our subscribers report that clients who do their FinaMetrica risk profiles typically say that it is a learning experience for them - having done so, they understand themselves and financial risk better.


Today I obtained concrete evidence of this actually happening.

I had arranged to do a webinar with a two-person wealth management firm to explain how an advisor uses clients' risk profiles in building relationships, selecting asset allocations, etc. The two advisers, let's call them Bill and Susie, and the customer service manager, let's call her Jane, had each done a FinaMetrica profile. On our 0 to 100 scale, Bill scored 61, Susie scored 70 and Jane scored 41.

The last of the questions in our questionnaire, asks you to estimate what your score will be. Bill estimated 60, Susie 75 and Jane 38. Clients usually get quite close as these were.

But this is where it gets interesting! The first question in our questionnaire is,

Compared to others, how do you rate your willingness to take financial risks?

  • Extremely low risk taker.

  • Very low risk taker.

  • Low risk taker.

  • Average risk taker.

  • High risk taker.

  • Very high risk taker.

  • Extremely high risk taker.

Bill, Susie and Jane ALL chose "Average risk taker"! Yet, by the time they had reached the final question the estimates they each made of their scores show that they had realised they were not average and now had a quite accurate understanding of how risk tolerant they actually were. Clearly, the process of doing a questionnaire had been educational in that they finished with a much better understanding of themselves.

This story is also a reminder that you can't simply ask clients how risk tolerant they are because in this case they all thought they were average, yet there were significant differences, particularly between Susie and Jane. Susie is two standard deviations above average and Jane is one standard deviation below. Putting this in terms of clothing sizes, Susie is an extra large and Jane is a small.

And as a parting thought, we know that advisors are significantly more risk tolerant than their clients. Will advisors who haven't tested their risk tolerance be influenced by their own idea of average when making portfolio recommendations?


by Geoff Davey
March 08, 2012