The EV standard Risk Profiler Questionnaire should be used only as a starting point for the discussion of risk. As with all questionnaires, there are a number of limitations that should be considered:
- Excludes investors who are not prepared to put any income at risk at all. Risk levels start at 'Little risk' not 'no risk'.
- It doesn't take into account the capacity for risk. This should be discussed separately.
- Doesn't take into account other needs, objectives or circumstances
- Doesn't take into account the time horizon of any objectives, or the purpose of the income for the purpose of assessing the attitude to risk, but an appropriate asset allocation for a given attitude to risk should take account of such objectives.
- Target market averages may not be the same as the individual using them.
- Results will vary depending on where in the advice process the questionnaire is used. For example, if used before any fact-finding at the start, it could be used by investors who are not prepared to do any investing because they have no capacity and/or are not willing to take any risk at all.
- Giving investors a guide to risk before answering the questionnaire could change the answers that are given. The questionnaire should be answered without intervention or help to get a truer picture, in the same way as giving a guide about behaviour and personality before answering a personality questionnaire would also affect the results.
- A client may say that they agree to the level of risk described, but do they actually know what impact this would have on them? Stochastic modelling can show this, including the benefits of diversification.
- Check that the model asset allocations and risk resulting from the questionnaire are still relevant to the individual investor given their objectives.
- The questions need to be considered as a whole. Inconsistent answers would require further discussion with the client to ensure they understand what they really want.
- It measures the attitude to risk at a point in time. As circumstances change the attitude to risk of an investor is also likely to change and should therefore be re-assessed.
- The intended target market is people who are looking to draw an income from their investment for a number of years. It has been assessed on investors being provided advice in the UK.
- The product and fund selection will affect the risk of the implemented strategy and should be reviewed to ensure it remains in line with the intended risk profile. For example, a fund with 'Cautious' in the name may not necessarily be appropriate for a 'Cautious' investor. This is especially true in decumulation, where funds may have been created without a decumulation objective in mind.