Our research has shown that an accurate risk-tolerance profile is one of the most important elements of suitability.
Author Gillan Williams
Date 25th January 2017
Risk Tolerance is one of the most influential factors for differentiating one investor from another, and the foundation of helping to determine where they are on the relative scale of appetites for risk to identify and deliver suitable investments options. Oxford Risk’s suitability analysis uses risk tolerance as a proxy when empirically uncovering the risk/reward preferences of that group of investors. It is vital, therefore, that the highest degree of accuracy and relevance is achieved when establishing an investor’s Risk Tolerance. The Pension Schemes Act has introduced new freedoms to older investors, and new market opportunities to advisers and providers. When considering these options, Risk Tolerance will play a role in narrowing down the suitable choices by indicating the overall preference for risk of the investor. From there, the investor can explore the circumstances specific to them to ensure their goals can realistically be achieved. The goal, its importance, the time horizon, and the capacity to bear loss need to be addressed to determine how best to deliver a solution that fits these requirements with the overall preference for risk their Risk Tolerance reveals.
At present Risk Tolerance standards in the industry universally focus on determining willingness to take risk, when accumulating wealth. As such, the resulting risk profiles are less useful for those investors that consider avoiding loss a more important priority than growing their wealth. This shortcoming arises naturally from the fact that most risk-tolerance assessments were created prior to the Pension Schemes Act, when the main option for the average retail investor at the time of retirement was purchasing an annuity.
To better assess the Risk Tolerance of investors that are focused on decumulating their wealth, and investing with the goal of ‘drawing-down’, Oxford Risk has developed the Decumulation Risk Tolerance Assessment. This instrument maintains the structure of the traditional psychometric risk tolerance assessments, but poses questions that have been specifically calibrated to measure the investor’s willingness to take risk with a focus on loss aversion as the key factor for the investor. The result is a more accurate and relevant risk tolerance measure, that can then be used as the foundation of the process of ensuring suitability. At such an important part of an investor’s life, the correct focus when uncovering their risk profile can be the difference between delivering suitable advice/guidance, or focusing on a ‘growth’ mentality which is no longer the investor’s priority.
The Decumulation Risk Tolerance Assessment is now available to trial and use, adding to the suite of risk profiling services available from Oxford Risk – widely considered the most accurate and easy to use in the industry. By adding this assessment to your ORR Online account, you can be confident that your clients’ risk profile have been calculated correctly, and you will be able to offer them the most suitable options for both their accumulation and decumulation requirements.
You can read more on our approach to suitability by clicking here.
To get in touch for more information and a free trial of our decumulation risk tolerance assessment, click here
Click on one of the links below to subscribe to the Oxford Risk podcast