Do Risk Questionnaires Need an Overhaul?
Traditional risk questionnaires have been a staple of financial advice for decades. But are they still fit for purpose in the modern world?
The Problem With Traditional Risk Questionnaires
For decades, financial advisers have relied on risk questionnaires to gauge how much investment risk clients should take. You've probably completed one yourself - questions like "How would you feel if your investments fell 20%?"
But here's the problem: how you think you'd feel is often very different from how you actually feel when it happens.
Studies show that investors consistently overestimate their risk tolerance in bull markets and underestimate it in bear markets. This is known as the "empathy gap" in behavioural finance.
The Gap Between Theory and Reality
Research consistently shows that:
People overestimate their risk tolerance in bull markets - When everything is going up, we feel invincible
They underestimate it in bear markets - When markets crash, even "aggressive" investors panic
Past experience heavily influences current attitudes - Someone who lost money in 2008 will answer differently to someone who started investing in 2020
Answers change depending on how questions are framed - The same question asked differently can produce opposite results
A risk questionnaire completed during a market peak will give you a very different result to one completed during a crash - yet your actual circumstances haven't changed at all.
A Better Approach
At Altor, we believe in going beyond the questionnaire. Our approach combines multiple factors to truly understand your relationship with risk:
1. Capacity for Loss
This isn't about feelings - it's mathematical. Can you afford for your investments to fall without affecting your lifestyle or goals?
We analyse your income, expenses, existing assets, and time horizons to determine how much volatility you can actually withstand.
2. Need to Take Risk
If you can achieve your goals with lower-risk investments, why take more risk than necessary?
Sometimes the most sophisticated investment strategy is the simplest one. If you're on track to meet your goals with a conservative approach, there's no need to chase higher returns.
3. Behavioural Understanding
Through ongoing conversations, we learn how you actually respond to market movements, not just how you think you would.
This is why regular check-ins matter - we observe your real behaviour over time.
4. Goal-Based Planning
Different goals might warrant different levels of risk:
| Goal | Typical Risk Approach |
|---|---|
| Emergency fund | Very low risk - needs to be stable |
| House deposit (2-3 years) | Low to medium risk |
| Children's education (10+ years) | Medium risk |
| Retirement (30+ years) | Higher risk acceptable |
The Standard Life Advantage
As a Standard Life employee, you have access to Altor's comprehensive risk profiling as part of your benefits package. This goes far beyond a simple questionnaire to truly understand your financial personality.
Our approach has been developed over years of working with clients through multiple market cycles. We've seen what works - and what doesn't.
Key takeaways
- Traditional risk questionnaires often fail to capture your true risk tolerance
- Your answers change based on market conditions - not your actual circumstances
- A better approach considers capacity for loss, need to take risk, and behavioural patterns
- Different goals may warrant different levels of investment risk
