Risk Questionnaires are no substitute for intuition

Thursday, 14th April 2011 14:33 - by Resident IFA

I had an experience on Monday that re-iterated the lack of absolutes in financial planning...and possibly life in general. I pride myself on my lack of earnings-motivated actions. I am fortunate in that I am involved in a successful second business, taking any pressure away from my day-to-day IFA activities. The Clients I met on Monday – and I advisedly use the word ‘Clients’ in the present tense, as they took my advice on Annuities and ISAs in the last few weeks – practically turned-down flat my recommendation for an investment to satisfy their retirement income needs. Aside from this development, the 100+ hours put into the case on a non-fee basis makes me think hard about the potential to move solely to a fee-based advice offer sooner rather than later! Anyhow, back to the (for the time being) declination of my suggested financial solution. The Clients used the shocking phrase “this has taken us so far out of our comfort zone”. For an ethical chap, this mortified me. The root of the problem seemed to be a combination of their lack of investment experience and the result of the ‘Risk Questionnaire’; used to ascertain their appetite (or not) for investment risk towards recommending a suitable product and underlying investment funds. The Clients came out as ‘Balanced’ investors – 5 & 4 respectively out of a scale of 10 (10 equating to high-risk). I would then set this against the background of my actions in: o Ensuring the investment product recommended had the most appropriate tax treatment for the Clients, both now and in the foreseeable future. o Releasing less than the maximum available income from the product, aiming to boost the chances of capital stability and providing excess allowable income to be taken (if needed) in future. o The creation of a portfolio of 16 best-of-breed funds; showing both the positives of higher average return and lower volatility (risk/fluctuation) than their peer group sectors. Great, eh? No, this means nothing unless a Client is entirely comfortable with taking such an action with a large sum of their hard-earned money. I entirely agree. The Clients did not entirely rule out action but, clearly in the cold light of day, inhabit the definition of ‘Inexperienced’ investors, having only had a couple of small, pretty useless bank-sold equity ISAs to count as experience within the last 10 years. As an interesting aside, it is entirely logical – but bent-out-of-shape in its own way – that the male Client was more than happy to entrust a large sum of money to his previous company as an interest-bearing loan. This is because he knew the company and business sector intimately, having trust in his knowledge and judgment through years of first-hand experience. No matter the cold, hard facts that this is just one small company, which could easily have any one of a number of events adversely affect it; compared to 16 professionally-managed investment funds containing many, many companies in diverse industries, a lot of which will be household names with long and handsome track records. Again, he rightly drew a line between what he knows and what he does not, regardless of the massive risk a one-company investment actually subjects him to. I entirely understand this experiential decision-making. How else do we know not to place our hands on just-boiled kettles as adults...after doing it once as a child...once being enough! Despite my updates at every step of the way to check Client comfort and that all seemed to be heading in the right direction, there is no substitute for a little more active listening and empathy on my part. The Clients eventually queried the result of the Risk Questionnaire – and I can see their point; even if it might be the exception rather than the rule. So, a bit less time spent on empirical issues and fiercely concentrating on doing the (somewhat blinkered, as it turns out) utmost best job I could, perhaps I could have stepped back and verbalised the likely scenario and recommended outcome a little earlier in the piece. All is not lost...the Clients may well see the benefits of acting after they settle into retirement over the next weeks and months...but this is chalked-down as a significant learning experience for me nonetheless. Until next time...