The FinaMetrica system of risk profiling “provides a scientific assessment of an individual’s personal financial risk tolerance.” Designed in 1997 and later adjusted in 1998, the system was finally patented in January of 2006. The 25 question test is used to determine the risk tolerance of individuals so they can have a better understanding of the types of portfolios that best suit their desire for return and stomach for risk.
Risk tolerance can be defined as “the extent to which a person chooses to risk a less favorable outcome in pursuit of a more favorable outcome”. Risk tolerance is believed to be both a product of nature and nurture. As a product of nurture, risk tolerances can change due to life experiences, both good and bad.
This is not to be confused with risk capacity, which is based off not how much risk you are willing to take, but how much risk you can afford to take. It is the monetary amount of money one can afford to lose while trying to accomplish a greater goal, yet still staying within capacity to achieve those goals. While both risk tolerance and capacity are important in their own respects, FinaMetrica’s system focuses on risk tolerance.
In the process of creating the system, FinaMetrica polled both advisors and clients. They were asked to estimate what the risk tolerances of the clients would be based off of the test. The results showed that clients were somewhat knowledgeable of what their risk tolerances would be, but advisors on the other hand, were wrong more often than not. Advisor’s who use the system for the first time with their clients often report multiple cases where they drastically misread clients that had been with them for quite some time.
Bridging the gap between financial advisors and the understanding of their clients is FinaMetrica’s primary goal. The more the system can create an understanding of a clients wants and needs, the greater the chance the advisor has to deliver such. FinaMetrica is not content with their progress and is constantly researching to improve the system it created over 10 years ago.
For years now I’ve used the FinaMetrica system with my clients. It’s helped me engage clients in meaningful discussions about their personal attitudes and feelings about risk and volatility.
