When it comes to investments, some are willing to take a risk and some are not. When it comes to risk, the decision is not about whether risk is the right thing to do but rather if the particular investment is the right one for you and your client.
To help financial advisors determine the likelihood of a client pulling his money or deviating from the investment policy, financial advisors should ask clients which they prefer to focus on: the loss or the upside of an investment.
I had one client in particular who runs a software company. She indicated that she wanted a large upside and was willing to take the risk. However, in the FinaMetrica risk profile, she scored very low. And on the loss aversion question, she indicated that she would only tolerate a small loss.
Because she tended to dwell on the negative outcome, she would most likely react poorly when the stock market began to decline. As a result, we kept her out of stocks and put her into less volatile investments.
FinaMetrica’s risk profile is quite helpful, because it gives investors the opportunity to also think about loss aversion and not just risk aversion. For this, the FinaMetrica risk profile helps advisors start a conversation with clients.
FinaMetrica uses 25 questions focused on a person’s experience with risk as well as expected returns. Many broker dealers are not integrating it as well as Garrett Investment Advisors and AICPA do. You can get an annual FinaMetrica subscription or pay a higher per-client fee. Additionally, many financial planning software tools like MoneyGuidePro are incorporating into their systems.
I would like to note that I have not been paid by FinaMetrica to write this article, but it is just my observation of having used it for over seven years.
As a financial advisor, it pays to ask individuals what investments they have chosen in the past and how much risk they have taken. These answers are key in helping to determine if your clients are in the right investment.