Summary
Assessing a client's risk tolerance and capacity for loss is a regulatory requirement and crucial for delivering the best client outcome.
Many existing risk profiling tools lack robust foundations, often asking leading questions and conflating volatility and risk.
Timeline has developed a rigorous approach to risk profiling based on extensive academic research and robust modeling using 120-year asset class data.
The Timeline Risk Profiler clearly describes how clients view risk and loss and how an investment portfolio might be structured.
The tool calculates the risk score by assessing attitude to risk based on questionnaire answers, checking the reliability of this score based on the client's previous experience and knowledge of investments, and checking whether the risk score is suitable for the client based on their capacity for loss.
The tool is designed to be part of client discussions and should not form the sole basis of recommendations.
The tool is included in the Timeline subscription and offers white-label branding and adviser support.
Description
The Problem with Existing Risk Profiling Tools
Many advisors have expressed concerns about the existing risk profiling tools on the market. These tools often lack robust foundations, ask leading questions, and have a weak approach to assessing risk capacity. They also tend to conflate volatility and risk, which can discourage equity risk-taking, potentially damaging the long-term objectives of most clients.
Timeline's Approach to Risk Profiling
At Timeline, we have applied our rigorous approach to risk profiling based on extensive academic research. Our robust modeling, which uses 120-year asset class data, enables us to look at investment risk from a unique vantage point that other risk profiling tools lack.
Timeline's technology captures detailed information about the end clients, including age, relationship status, income, expenditure, and financial goals. This allows us to assess the likely impact of falls in asset value on the client's objectives and lifestyle. We do this rather than using the misguided, abstract lens of 'volatility' typical of other risk profiling tools.
Our Risk Profiler generates clear descriptions of how clients might view risk and loss and put this into context as to how an investment portfolio might be appropriately structured. Advisers can download inputs and resulting outputs easily for client reports.
The Science Behind Timeline Risk Assessment
The Timeline RiskProfiler looks at the following components of the risk profile:
Attitude to risk and volatility
Knowledge and experience in investments
Capacity for loss
This approach is guided by extensive academic evidence and regulatory requirements. We also consider the regulatory obligation to place knowledge, experience, and capacity for loss at the center of risk profiling.
How Timeline Applies Academic Evidence in Practice
The Timeline Risk Profiler specifically addresses the regulatory requirements by using a questionnaire to assess attitude to risk and volatility, as well as knowledge and experience of investments. We use a client's actual finances to assess capacity for loss.
Our tool is designed to be used as part of client discussions. While the output may match clients' willingness to take risks and capacity for loss, it should not form the sole basis of your recommendations. If a client scores 1 out of 10 on the Appropriate Investment Strategy, discussing the appropriateness of any risk would be a good idea.
Conclusion
At Timeline, we are committed to providing robust and reliable risk profiling tools that truly serve the needs of our clients. By applying rigorous academic research and adhering to regulatory requirements, we ensure that our tools are fit for purpose and deliver the best client outcomes.