By Mike McDaniel, Chief Investment Officer
Jason Zweig pens a fascinating piece in the Wall Street Journal panning the qualitative and psychology approaches to risk tolerance as “almost useless.” And you know, I have to agree. Those old approaches are completely broken. They stereotype people by age, and move a few degrees based on useless questions like “do you ever get a thrill out of investing?”
Jason is dead right about that, but the good news is, he’s wrong about only one thing. There actually is a better way to truly understand a client’s risk tolerance — the quantitative approach. My guess is, he just hasn’t seen it yet. (Jason, my number is 530-748-1654. I’m a huge fan. Call me and I’ll show it to you.)
Decades of work in behavioral science has culminated in the quantitative approach to pinpointing client risk tolerance, based on the Nobel Prize-winning framework of Prospect Theory. And I can’t wait to show Jason just how Riskalyze is revolutionizing how advisors address risk and reward with their clients. He will rejoice with us that advisors and investors are no longer forced to entrust their financial futures to flawed, subjective risk questionnaires.
Riskalyze’s patented risk assessment technology objectively calculates the analytical description of an investor’s monetary utility — what Riskalyze calls the Risk Fingerprint — often times referred to as the “comfort zone” or “risk tolerance” of an investor. Investment advisors use the Riskalyze questionnaire schema to objectively fuse vetted bodies of work in the areas of monetary utility, decision, and survey methodology, including the Nobel Prize-winning work of Dr. Daniel Kahneman and Dr. Amos Tversky on “Prospect Theory.”
By delivering a quantitative expression of an investor’s monetary utility, coupled with powerful portfolio risk analytics scored on the same Risk Number scale, Riskalyze addresses the nuances between industry semantics like “risk tolerance,” “risk perception” and “risk capacity.” The output of a completed Riskalyze risk questionnaire and Retirement Map captures and communicates the right information for each of those elements, using real dollar amounts, not irrelevant semantics.
Most importantly, Riskalyze overcomes the danger of misunderstood semantics by using investment amounts relevant to each individual investor. With Riskalyze technology, the ambiguity of whether an asset manager, advisor and client are all defining “conservative” or “aggressive” the same way completely disappears. Using objective numbers solves a myriad of advisor-client communication problems.
We agree that comparing investing with a trip to Las Vegas is as dangerous to investors as entrusting a subjective one-size-fits-all risk questionnaire written by a team of psychologists or investment product wholesalers.