Weapons of Mass Financial Destruction

The biggest risk to a client portfolio is running out of money in retirement.

For decades, our profession has relied on "Attitude to Risk Questionnaires" to ascertain how much risk a client is prepared to take in their investment portfolio. It normally means achieving a score and this score determines how much you invest in equities and how much you invest in fixed income. The more you invest in fixed income, the greater the chance of running out of money in retirement. So someone who scores low after spending ten minutes of their life filling in this questionnaire, will more than likely run out of money in retirement.

We call the questionnaire a "weapon of mass financial destruction" or "mumbo jumbo questionnaire".

There is nothing wrong in completing one, purely to start a conversation about investment risk. We do this all the time. However, scoring someone and then putting them in an inappropriate portfolio and leaving them in it for thirty years or more is a complete dereliction of duty.

Mumbo Jumbo questionnaires largely focus on questions about how you would feel if you experienced a bear market (a loss of 20% or more). Most novice investors would answer that they would be terrified and would probably bail out. So the questionnaire gives you a low score, directs you into a portfolio heavily invested into fixed income...and your fate is sealed.

Volatility is routinely treated as something to be reduced or avoided. In truth, volatility is the engine of long-term returns. It is not a defect in the investing system; it is the feature that creates growth. When portfolios are designed primarily to minimise short-term discomfort, they often sacrifice the very returns required for future financial independence.

What makes this particularly uncomfortable is that none of this breaches regulation. It is perfectly compliant as risk scores align with model portfolios and suitability reports are well documented. Yet the portfolio itself is incapable of delivering the outcome the client actually needs.

So clients retire with insufficient assets, withdrawals are taken from portfolios that never had the growth capacity to sustain them and eventually the money runs out.

In short, we use our questionnaire to start a discussion about investment risk, nothing more. Following our discussion, we will then make a recommendation as to which portfolio is most appropriate for your needs. We will NEVER pigeon hole you into an inappropriate portfolio, based on you filling in a 10 minute questionnaire.

More News, Insight & Opinion