Since the Financial Conduct Authority's thematic review of retirement income (TR24/1), attitude to risk questionnaires and their use in recommending funds and products have been put under scrutiny.
We take a deep dive into the research behind attitude to risk (ATR) questionnaires, how they can be applied in accumulation and decumulation, and what other factors might affect a client’s investment solution.
Designing an ATR questionnaire
ATR questionnaires have been around for decades and are largely ingrained into the financial advice process, but does this mean we have forgotten why we started to use them in the first place?
Cobs 9.2.2, the UK’s incorporation of Mifid, dictates that advisers must understand a client’s ATR when assessing suitability, and must also ensure that the client understands the risk of any recommendation before the transaction takes place.
At their core, ATR questionnaires attempt to give a client a risk profile representing how much risk a client is willing to take in order to help financial advisers pick a suitable investment solution. But how are these questionnaires calculating the risk of each client that takes them?
Most well used ATR questionnaires are psychometric. Psychometric tests are standardised psychological tests designed to measure abilities, attitudes, aptitudes, or personality traits.
ATR questionnaires are generally personality tests, designed to measure an individual’s characteristic patterns of thoughts, feelings, and behaviours.
Some ATR questionnaires are psychometric and results in clients being ranked from a risk level one to a risk level 10. It is important to understand that these numbers represent the amount of risk your client is willing to take relative to other people that take this questionnaire, and can only help you to pick a suitable investment solution when it is applied to a full range of investment solutions.
In isolation, all that an ATR tells you is where your client sits against other people.
Our ATR questionnaire was developed in-house with our own psychological and behavioural experts, in conjunction with Henley Business School (part of the University of Reading), and the underlying model is checked each quarter under our own due diligence process to ensure it is still fit for purpose.
The model was developed to follow a largely normal distribution across the 10 risk categories. With more than 2mn responses to our ATR we are confident that our model allows individuals of all ages and stages of life to be ranked appropriately in terms of their attitude to risk, and we can check this statistically each quarter.
Visually, we expect and see that our questionnaire results in a generally normal distribution of risk profiles being assigned to financial advice clients.
Psychometric questionnaires result in clients being ranked against each other, so providers need to ensure that our ATR is appropriate for as wide a range of people as possible to ensure the best possible statistical results. This means ensuring that language used in the questions are appropriate for people in different phases of investments, including growth and withdrawals phases.
