Most investors off base when it comes to risk: Report

Investors' perception of risk, rather than risk tolerance itself is what's affected by volatile market conditions, according to a new report by FinaMetrica, the Australian risk-profiling company.

Thanks to industry-standard risk questionnaires that tend to be biased toward higher risk/return outcomes and advisors that are significantly more risk tolerant than their clients, most investors likely have portfolios that are more risky than they might have bargained for.

Despite this, investors’ ability to withstand risk has remained fairly stable through the bull market of 2003-07 and the subsequent bear market, Finametrica says.

"This is good news for advisors. Advisor and client share a common interest: neither wants the relationship to end in disappointment, and both want to reduce the potential for abrupt reversals. If the client’s risk tolerance collapsed in a bear market there would be little the advisor could do to prevent a panicked sale."

"However, if increased risk perception is the likely Achilles heel, then the advisor can influence the client’s risk perception through education about market risk," the report says.

FinaMetrica also maintains that advisors don't place enough emphasis on the importance of risk tolerance, saying it's “simply a box to be ticked for compliance purposes before moving on to the real business of advice”.

What's your experience with risk profiling? Are you satisfied that what you bought was what you could really handle? Or did anyone really ask?

By Gordon Powers, MSN Money

Posted at 07:07 AM in Advisors, Behaviour, Markets, Money management | Permalink