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Using Your FinaMetrica Risk Profile

You should start by making sure you understand the Risk Profile report and are comfortable with what it says about you - Know Yourself Better.

Then, if you are one of a couple, you and your partner can compare and contrast each other's reports - Know Your Partner Better.

Finally, if you use a financial adviser or are considering using one, we explain how to use your risk profile report with your adviser - Get Better Advice.

Know Yourself Better

Most people find that the very process of completing the questionnaire and studying their risk profile report leads to a better understanding of financial risk and their risk tolerance. For many it is the first occasion they've actually spent a concentrated block of time considering these issues and themselves in that context.

Understanding Your Report

Your Risk Profile report is in two parts - an assessment of your risk tolerance followed by general information about risk tolerance and the FinaMetrica test. If you haven't already done your own FinaMetrica Risk Profile, it may help in the explanation that follows if you download and print the one-page Annotated Jean Sample report.

Download and Print the Annotated Jean Sample Report

Under the heading, Your Risk Tolerance Score, the Risk Profile report

  • Provides your risk tolerance score and a higher/lower % comment, Jean’s score is 58, higher than 77% of all scores.
  • Identifies your Risk Group, and Jean is in Risk Group 5.
  • Reports on how accurately you estimated what your score would be. Jean estimated the score quite accurately.

Like many human characteristics, risk tolerance is Normally distributed, i.e. when scores are graphed they form the familiar bell curve. Your score is calculated statistically by comparing your answers to our statistical database for the adult population. To make scores more meaningful, the 0 - 100 scale is divided into seven Risk Groups, with score ranges and the proportions in each group as shown.

Under the heading, Your Risk Group, the Risk Profile report:

  • Counts the number of answers you gave which differ from those typically given by others in your risk group, For Jean, three.
  • Describes your risk group in terms of the answers typically given by those in your risk group, and For Jean, Risk Group 5.
  • Below the relevant part of the Risk Group description tells you, in italics, exactly how your answers differed. The specifics of each of Jean's three differences can be seen in her report.

You can see all seven risk group descriptions and how the risk group descriptions change from one risk group to the next by downloading our Risk Group Summary document.

View Risk Group Summary

In your Risk Profile report, the Risk Group description (as modified by the reported differences) is a verbatim statement by you about yourself in relation to risk. Jean Sample is saying, "I think of 'risk' as 'uncertainty' . I have a reasonable amount, if not a great deal, of confidence in my ability to make good financial decisions. I usually feel at least somewhat optimistic about my major financial decisions after I make them ...

Typically, there will be from three to five differences. Differences occur because, while those within a Risk Group are similar, they are not clones. Those whose scores fall at either end of a Risk Group tend to have more differences than those in the middle.

The number of differences is an indication of your consistency when it comes to financial issues. Occasionally, a report will show many differences – eight or more, indicating a lack of consistency in financial matters. Of itself, this is not a negative characteristic - some people are just less consistent that others.

Confirm Report Accuracy

Does the report seem accurate? Did your score seem too high or too low? If so, remember that your answers were compared statistically to norms based on the adult population. So, for example, if your score seems too high it will be because other people are less risk tolerant than you thought. Think about how you formed your views about other people’s risk tolerance. Who are you comparing yourself with?

If you find something you think is inaccurate, go back to your completed questionnaire and look at your actual answers.

It is possible that you made a mechanical mistake in selecting an answer option. One such mistake will not affect the risk tolerance score by more than a few points. The mistake should be noted and the score can be used as it stands. If there are multiple mistakes, the questionnaire should be done again.

Know Your Partner Better

Most couples have differing risk tolerances - in some cases the difference is extreme. Most are aware which is the more risk tolerant of the two but usually not the size of the difference nor where exactly the difference arises.

Comparing risk profile reports provides the "big picture" overview of any difference. Comparing completed questionnaires provides the fine details.

Knowing where and by how much you differ will help you better understand one another. This better understanding should help you to better manage the difference in joint financial decisions. If you use a financial adviser, he or she should be able to suggest several alternative strategies for managing the difference. But it is not a decision a financial adviser can make for you. You must decide this one for yourselves.

Get Better Advice

Risk Tolerance is Important

Risk tolerance is an important factor in financial decision-making. Risk tolerance affects not only how psychologically receptive you are to decisions involving risk but also the degree of anxiety you experience in situations where risk is evident.

Risk tolerance is best defined as the extent to which you are prepared to risk experiencing a less favourable outcome in the pursuit of a more favourable outcome1. Risk tolerance represents a trade-off on the continuum from minimizing unfavourable outcomes to maximizing favourable outcomes, not just an upper limit on unfavourable outcomes.

Most people accept the universal truth of “nothing ventured, nothing gained.” It is simply a question of where each individual is psychologically comfortable with setting the balance point.

What we are talking about here is your financial "comfort zone". Too little risk (for you) and you won't feel you're making the most of your opportunities. Too much risk (for you) and you're going to be anxious, worried or even panicked.

It is very important that your adviser gets as good an understanding of your risk tolerance as possible. And this is not easily done without a good (psychometric) risk tolerance test. The average financial adviser is significantly more risk tolerant than the average client. What an adviser would do in your situation may not be something you'd be comfortable with.

If you're one of a couple who have done their FinaMetrica risk profiles, you will probably have already seen how easy it is to misread someone you know really well - let alone a virtual stranger, which you are likely to be when you first start with a financial adviser.

Unfortunately, assessing clients' risk tolerance is currently a systemic weakness of financial advising. While there are many hundreds of advisers using FinaMetrica here and nearly as many again internationally, the vast majority still use techniques that have been proven not to work. In one Australian study, the level of inaccuracy in advisers' estimates was so high that the overall results would have been more accurate if the advisers had not made any attempt to assess risk tolerance at all but rather simply assumed everyone was average. For more information see "Why Your Adviser Might Need Help under ABOUT YOUR RISK TOLERANCE" in the menu to the left above.

Instructing Your Adviser

Your risk tolerance is one of the most important pieces of information your adviser should know about you.

If you are going to a new adviser for the first time, show your risk tolerance report during the initial information-gathering step that must precede the giving of any advice.

If you already have an adviser, you may wish to show him or her your FinaMetrica Risk Profile report without delay but in any event at your next review meeting. It is quite possible that your adviser will change the advice previously given in light of the new information about your risk tolerance. If so, this should be seen as a benefit of FinaMetrica's advanced methodology rather than a reflection on your adviser.

The information-rich risk profile report will lead to a more informed discussion of risk and risk tolerance, resulting in your adviser having a deeper understanding of you and a better reading of any differences between you and your partner.

The report spells out the details of your unique risk comfort zone in a way that both you and your adviser can understand. You should use the report to give your adviser clear instructions as to the level of risk you normally choose to take.

Even if your adviser is obliged by his or her head office to have you complete their (non-psychometric) risk questionnaire, you should obtain (written) confirmation from your adviser that he or she accepts your FinaMetrica risk profile report as your statement of your risk tolerance. If he or she is unwilling to do that, you should consider finding another adviser.

If you already have an adviser, it will be informative to compare your FinaMetrica Risk Profile report with whatever your adviser has already done by way of assessing your risk tolerance. In the documentation you have been given by your adviser, your adviser should have set out his or her understanding of your risk tolerance and asked you to confirm that you agreed. Your adviser should also have said whether or not the recommended strategies were consistent with your risk tolerance and, if they were not, obtained your acknowledgement that you understood this.

If you would like to do a quick test of your adviser's understanding of your risk tolerance, ask whether he or she thinks you're average, above average or below average. If above or below average, ask by how much? Those who are comfortable with statistics could ask your adviser to estimate your score assuming a normally distributed scale with mean of 50 and standard deviation of 10 (the FinaMetrica scale.) Your adviser should be able to get within 10 points of your FinaMetrica score.

If you would like us to send your adviser information about how to interpret and use your FinaMetrica risk profile, we tell you how to ask us to do that in the email which confirms your purchase of a FinaMetrica Risk Profile.

If you would like your adviser to learn more about the FinaMetrica system, direct them to FinaMetrica's industry portal site, www.riskprofiling.com.

Working With Your Adviser

Your adviser will suggest strategies that are intended to achieve your goals. Usually one such strategy will be an investment strategy. It is quite possible that your goals may not be achievable from the resources you have available at the level of risk you are comfortable with.

Ask your adviser whether their advice is consistent with your risk tolerance (as evidenced by the FinaMetrica report),

  1. If Yes, ask for confirmation in writing.
  2. If No, ask your adviser for suggestions as to what to do. Don't be alarmed. It is all too human to go into a situation with overly optimistic expectations only to find you have to scale back, allow more time, spend more money or some combination of all three - think of a home renovation.

The advisers suggestions may include some or all of the following three alternatives:

  • Take More Risk: You could decide to take additional risk with your investment strategy in the expectation of earning a higher return, knowing that you may be uncomfortable from time to time. For instance, if you are low risk tolerance you might be willing to take a medium level of risk (but probably not a high level of risk.)
  • Invest More: Perhaps you could spend less now and save more. There may be personal-use assets that could be sold (or down-sized) with the proceeds being invested. Alternatively, it may be possible to increase personal-exertion income.
  • Ease Goals: You could delay, reduce or forgo goals. Which of the goals you set are most important to you? Do you really need what you'd hoped for or could you settle for less or delay, say, the new home or your planned retirement?

Your adviser should be able to suggest a range of alternatives and, using modelling software, illustrate the impact of each alternative on the achievement of your goals, either the original ones or a modified set.

Preparing a financial plan invariably involves trade-offs. Don't worry about the fact that you might have to make trade-off decisions but make sure they're your decisions not your adviser's. Make sure you understand the alternatives and the consequences of each. A good adviser will be invaluable here.

When you have finally decided, your adviser will want to document the trade-off decisions and the reasons they were made in your plan, and will ask you to sign-off on the plan.

Of course, a financial plan is not set and forget. It will need to be reviewed as your circumstances change and events unfold.

Similarly, your risk tolerance should be reviewed. If you are new to serious financial planning, you should re-do your risk tolerance before the first (annual) review of your plan. Because life events can influence risk tolerance, any major event that occurs (good or bad) should trigger a review of your risk tolerance. Otherwise, a review every two or three years is appropriate. You can think of your risk tolerance as your financial blood pressure.