What kinds of risks do A2Risk profiling tools assess?
- Attitude to risk –the client’s psychological willingness to take risk
- Need to take risk –the client’s need to take risk to earn their required return based on their investment goals and time horizon
- Capacity for loss –the client’s financial ability to bear risk and cope with adverse outcomes. It relates to investment horizon, and the level of income, assets and liabilities.
Financial advisers commonly use our ATRQ System to assess ‘attitude to risk’ and ‘capacity for loss’ and use their own cashflow tools to measure ‘need to take risk’.
What components make up a client’s attitude to risk?
- Investment knowledge – more knowledgeable clients tend to be more risk tolerant
- Overall comfort with risk – some clients are simply more comfortable with risk in general
- Investment preferences – client’s perceptions on the risk of particular kinds of investments
- Regret – clients prone to regret tend to be less risk tolerant
Which investors can be assessed with ATRQ risk profilers?
A2Risk tools are regularly tested and updated through surveys against the GB population and so can be used to build risk profiles for all investors regardless of their unique situation but with one important caveat:
Because investors’ risk tolerance changes depending on whether they are investing to meet goals (accumulation) or have already retired and are drawing down their investments (decumulation) we have developed separate versions of our ATRQ System for each of these situations. We also have a separate retirement income solver tool that help clients choose between annuities, lump sums or other options at the point of retirement.
How many questions are necessary to build a risk profile?
Based on our research and use in the field, we believe 12 questions is the sweet spot that yields valid results but takes six minutes or less to complete.
Using a questionnaire any shorter – and these are used by some firms in the UK – means the answer to each question has a big influence on results, so a single error in the response makes the entire profile invalid. Conversely, there are also longer questionnaires in use but clients become fatigued answering which also makes the results unreliable.
What methodology did you use to create your attitude to risk questionnaire?
How do you ensure the questions are easy to understand?
We have carefully designed our risk profiler based on experience in questionnaire research and have thoroughly tested, refined and re-scored each questionnaire in multiple phases since 2006 based on feedback from extensive client use.
In practice this means we have created clear and straightforward statements to which investors can respond. We have avoided questions that present complex investment scenarios or require calculations or working with mathematical concepts such as percentages. Many clients would be uncomfortable with such questions. We have also sought to avoid questions that are vague or deal with issues that people might not be familiar with.
How do you show your questionnaires do what they say they do?
How do your risk descriptions line up with fund risk weightings?
ATRQ provides up to ten different personality categories that can be matched to risk weighted portfolios ranging from ‘very cautious’ to ‘very adventurous’ but we advise clients to distinguish between five or seven personalities in practice.
Is ATRQ ‘open platform’ – can I add it to my website?
Do investors need financial knowledge to use your risk profiler?
Can I recommend a client portfolio using the ATRQ results?
Advisers should use ATRQ as just one of several inputs when advising clients on portfolio selection. The recommendation should also consider the client’s ‘need for risk’ (their objectives and the return required to meet them) and any other unique circumstances that they have. The ATRQ can be used as a starting point in the discussion of what a suitable portfolio might be. Often the ATRQ is used alongside cashflow modelling software that can show the possible range of outcomes from an investment to calculate ‘need for risk’.
What if a clients says their risk evaluation doesn’t sound right?
You should discuss with the client why they think that, and review the answers given to the ATRQ. You can show the client descriptions of adjacent ATRQ categories and consider if one of these is more appropriate. The aim of the discussion is to agree an appropriate category with the client, and it is important that the discussion is documented carefully.
What’s the FCA’s view on your risk profiling tools
Our questions are designed to be clear and have been rigorously tested. We have always described the ATRQ results as the start of a conversation about risk rather than a final answer. Following the FCA’s review we’ve conducted additional robustness checks and confirmed the statistical alpha of the profiler at 0.79.