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Q1 hedge fund letters, conference, scoops etc
It’s easy enough to throw a client a risk-tolerance questionnaire (RTQ) and call it a day. The RTQ is one thing; the client’s real emotions and behaviors are another.
Which one do you think they follow in real life?
Exactly.
Where the typical RTQ falls down
The emotional and psychological aspects of money govern behavior. So how do you understand people and where they’re coming from? How do you tap deeply into someone’s mind?
The traditional RTQ doesn’t. It fails clients and advisors. When a client answers an RTQ, they aren’t connecting with the fact that this piece of paper will determine what happens to them:
- Losing more money than they wanted to lose; and
- Having evidence that supports the case their attorney uses to sue an advisor for loss of money.
Instead, to them it’s just like filling out your license renewal form at the DMV: get it done as soon as possible and move on to the next boring task.
Blah blah blah.
For this reason, answers aren’t sincere. Clients could answer the questionnaire entirely differently on a different day.
Useless RTQ questions
Here are examples of questions I’ve seen on RTQs from well-known investment firms that tell you zilch about the client.
Pointless RTQ question #1
My knowledge of investments is: nothing, basic, fair, advanced.
Why this question achieves nothing:
Everyone who watches CNBC thinks they know everything about the stock market when essentially they know nothing. How many people are going to admit they know nothing about investments? I keep harping on the fact that, especially in the beginning, clients don’t trust you!
The question should be more like this: My knowledge of the investment risks likely to govern my portfolio is: nothing, basic, fair, advanced.
Pointless RTQ question #2
Examine the table below, which shows the best and worst case annual returns of five hypothetical portfolios. Which set of outcomes would you find most acceptable?
Scenario #1, average annual return 6%, best case 17%, worst case -6%
Blah blah blah
Why this question achieves nothing:
As said before on my podcast with Aaron Klein of Riskalyze, it is statistically unlikely that a portfolio will achieve any one particular market rate of return. Presenting a worst-case scenario like this, no matter how many disclaimers you tack on to the end of this questionnaire, is misleading.
This is irrelevant because it doesn’t name a dollar value. How many clients are going to connect with the fact that losing 6% of their portfolio equates to $500,000? Once they see the red ticks, it has an entirely different meaning to them than an innocuous little -6%.
Read the full article here by Sara Grillo, Advisor Perspectives
