How accurate is your investor suitability test?

Risk tolerance is a stable measurement, but it is limited by being a relative indication of the customer’s tolerance to risk

Gillan Williams
Author Gillan Williams
Date 12th August 2016

It is imperative to ascertain the suitability of the investments offered to your customers.

We can offer relevant sample data which provides empirically indicated levels of risk that is suitable for the customer. By taking into account the customer’s preference for risk and with a data range that has over 500,000 assessments to draw upon, we can determine the appropriate volatility range for them according to their desired time horizon.

We have developed a simple-to-use table which combines the Risk Tolerance Category and Time Horizon to determine which pool of investments is most suitable. If you are a large organisation, this provides the reassurance that your customer-facing team will be able to consistently offer the most appropriate investments.

You should consider repeating this test annually to ensure you have the most up to date information on your investor’s preferences, which are subject to change according to the influence of external factors. Our data shows that the most risk averse group in 2011 preferred around 3.5% annualised volatility for 5 years. This same group recently showed a preference of around 5%. Without continuous testing, such accuracy is not possible.

There is also the advantage that our suitability test is the current ‘gold standard’ and well accepted by the regulator.

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