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Are Risk Questionnaires A Waste of Time?

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Are these things worth anything? … or nothing.

Risk questionnaires have played a major role in retirement and investment planning for as long as I can remember; and I’ve used them no less religiously than any other advisor.   Frankly, I’ve always felt they were a little stupid.

Elmer Duckhunter walks into Brainy Smartsuit’s office at Behemoth Securities.  It’s a beautiful place, full of mahogany with lots of beautiful brochures in the lobby.   Brainy has been successful at Behemoth, gaining promotion to Sr. Vice President after selling more Secure Your Future product than anyone else in the office using the “Secret in a Box” software supplied by the product wholesaler. 

“How can I help you?”, Brainy asks.

“Well,” says Elmer, “I have a lot of money from all those Tractor Pulls I won and I think it’s time I began investing for my future.  What should I invest in?”

“I think I can help you, but first I have to know more about you!”

“Makes sense.  What do you want to know?”

Brainy pulls out the Behemoth Risk Assessment questionnaire.  “First, I’d like to know a little about how you feel about investing.”

“Okay.”  Elmer settles in.  “How many questions are there?”

Brainy smiles, “Just six.”

“Six?  You can learn everything you need to know about me with just six questions?”

“Trust me.  This is very scientific, “says Brainy.

“Okay.”

Brainy begins.  “On a scale of zero to 10, how much risk do you feel you can handle?”

“I don’t know.  What would a ‘five’ feel like?”, asks Elmer.

“Just pick one that you feel comfortable with, says Brainy.  “The people who prepare these know what they’re doing.”

Elmer thinks for a second.  “Well, back in 2007 I was a 9, but after the crash I was a 2.  Now, I don’t know what I am.  That’s why I’m here!”

“Well, I can’t tell you how much risk to take until you tell me how much risk you want; then, I can tell you what you told me and we’ll have the answer!”

“Huh?”

They both look at each other, then Elmer continues, “How much risk do I want?  Seems to me you should be telling me how much risk I need or don’t need!”

“But what if it’s more than you want?”, asks Brainy.

“I don’t know how much I want.  I need to know how much I should or should not have?

Brainy perks up.  “Now we’re getting somewhere.  What are your goals?”

“Simple”, says Elmer, “to retire with as much money as possible with as little risk as necessary.”

“How much is that?”

“How should I know?  You tell me.”

Brainy senses a lack of forward progress.  “Let’s come back to that.   Try this one:  If your portfolio went down, what would you do?”

“I’d probably ask you for advice!  Isn’t that your job?”  Elmer’s beginning to wonder if Brainy Smartsuit is so smart after all.  “Why are you asking me all this.  I just want to know what I should be doing!”

Brainy comes clean.  “We have regulatory compliance concerns.  We have to make sure what we recommend is consistent with how you feel about investing.”

“I’d rather have advice that’s consistent with what I need,” says Elmer.  Are you protecting me or your firm?

“Well, actually, both…”

“There are six of these?”  Elmer’s fed up.   He puts on his duck hunter cap with earflaps, and stomps out of the office.

Maybe these questionnaires can shed some light about attitudes; but, they don’t tell Elmer what he needs to know.  Elmer just wants to know what he should be doing and why.

Once he understands what and why, the rest gets easier.  Fear can exist only where there’s a knowledge vacuum.    When knowledge replaces ignorance, fear dissipates and understanding prevails.

Maybe questionnaires have zero to do with long term success for the client; but, they maybe do help sell more Secure Your Future product.

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Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting and wealth management services for individual investors. Opinions expressed are solely those of the author and fictitious names were created solely for their entertainment value and are not meant to represent any person or organization living or dead.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan.  The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com