Corwin wrote:
- quote -

Corwin, I think you're illustrating the problem with
risk-questionnaire-based asset allocation software. I don't think it's a
useful way of picking investments for the exact reasons you've come
across. How does the software reconcile inconsistent answers? And
setting the software aside, how much could be addressed by discussing
the replies with the client -- to see if some education would trigger
different replies or preferences?

To me that's the principal value of a risk questionnaire, it gets
discussions going. I can't imagine using the responses to plug into
software that spits out an asset allocation. I believe it's impossible
to design a questionnaire that would do an adequate job of providing the
information you need, except for the simplest of cases.

-Tad

"Corwin" <taxstud[at]gmail.com> wrote
[about a client's responses to a written "survey" of her
goals]
- quote -

Your concerns are completely valid. Rather than force a
portfolio on this person that she may not want, why can't
you sit down and discuss this further with her? This seems
the only honest, fair, and ethical thing to do.

Find out why she answered each question as she did. Explain
the discrepancies. See where her misunderstanding lies. This
will sell your employer's product better than the
alternative.

There are many mysteries in the universes of man .... That is, as you
pointed out, how personal perception in the absence of adequate
understanding can lead to answers that don't make a lot of sense.

Quick answer: yes. A conservative portfolio seems to be appropriate.
The feelings (disposition) of the client may well be more important
that her returns - if she feels comfortable, she may stick with you
even though it is not an economically "best" decision. I would guess
that's a question of balancing ethics - how effective would you be in
informing her more completely - but it IS her money, and her level of
comfort is important to her. Somehow I doubt she'd be made comfortable
with a "moderate" when a "conservative" worked.

However ...

A) If the expected returns are 7% - 9% why not mix up 33% bonds with
33% conservative and 33% moderate. The client might be more tolerant of
fluctuations that were "segregated" That's just a shorthand fix - if
you get on top of all the numbers, I'm sure you can come up with
combinations that will work.

B) If you got lucky and the portfolio appreciated before declining, you
might explain that her net value increased. The length of time she has
is important for average returns. Determine her requirements for
satisfaction and use surplus to "speculate" with moderate growth,
keeping a sharp eye on the possible drawdown of the surplus.

C) I'm a nut-case who believe the safest investments are those that are
most likely to grow rapidly. Just down-home USA, y'all know?

I mistrust computerized surveys - actually, I believe those are a
mathematical idiocy in the path of trying to dope out what's going on.
The best way to ask is to simply ask and observe, and allow the
surveyee to give you their thoughts. (E.g. GM survey many years ago
with over forty questions about preferences - not one of which covered
what I most wanted in a car.)

On an Asset Allocation Questionairre the client, who does not have a
lot of experience in the market, answered the question regarding
volatility with a response such as: "I am very uncomfortable with
fluctuations in the value of my portfolio. I would rather have an
overall lower rate of return in my portfolio than see its value
fluctuate wildly." (Or words to that effect).

Then one of the questions asks about investment objectives; the
possible answers being capital preservation, growth, growth and income,
aggressive growth. The client selected the growth and income box.

Later, one of the questions is: "what percentage of income do you want
this portfolio to generate?" The client checked off 0% to 2%. (This
is qualified retirement money with retirement in nine years.)

Another question asked: "what rate of return would you like your
portfolio to achieve?" The client answered 7% - 9%.

And, "this money should be invested in tax efficient funds" was another
answer.

After summing up the point totals for these (and other) answers, the
computer recommended a moderate allocation portfolio for this client.

So my point/question here is that at best, this client should have been
given a conservative to moderate portfolio despite what the computer
says. My thinking is that the client most certainly knows she'll be
quite uncomfortable seeing the value of her portfolio rise and fall.
On the other hand the client (like most clients without experience in
the market) is not really sure what the questions are asking regarding
potential rates of return or objectives. Unless the advisor explains
about the market, the client may as well have said "I expect my
portfolio to earn 15% returns over time, never losing value in the
meantime." The client has no idea at all what to expect as far as
returns go, and is only checking off an answer because of its position
on the page (perhaps, and assume this is so for argument's sake, for
now). But the client most definately understands the emotional impact
of a fluctuating portfolio value.

So, to get to a long-winded question, don't you think (as I do) in this
scenario that a conservative to moderate, or even a conservative
portfolio was more suitable for this investor, or do you think, as did
the sales desk at the BD, that a moderate porfolio was proper?