Last week on the U.S. News web site, there was a very insightful article by Rebecca Lake about the inherent problems with risk tolerance questionnaires.
Here is a link to her article on “How Risk Tolerance Questionnaires Can Steer You Wrong.”
I completely agree with each of the investment advice professionals quoted in the article. My client experience with risk tolerance questionnaires is the same. Investment advisors should disclose a cautionary tale for all individual company 401(k) retirement plan participants.
More and more company 401(k) retirement plan sponsors and providers are allowing access to online third-party robo-investment advisors. The linchpin of their individual company 401(k) retirement plan participant offering is a risk tolerance questionnaire.
Years ago, a long-time client of mine urged me to ask all new clients a simple stock and bond market risk tolerance question early in the relationship. The question is short and simple.
“How much money can I lose in your company 401(k) retirement plan account before you fire me?”
I ask this question multiple times each week; in phone conversations, e-mails, and in-person. I keep asking it because it works much better than any online risk tolerance questionnaire.
The look on each new client’s face is priceless. Even better, their response is always honest, straightforward, and from the gut.
Remember 2008-2009? Losing money earmarked for retirement is a gut-wrenching, emotional experience. A risk tolerance questionnaire can’t elicit the necessary individual investor emotions in order to provide useful stock and bond market risk management guidelines.
Individual company 401(k) retirement plan participants should learn from past professional investment advisor mistakes. Don’t ever rely on an off-the-shelf risk tolerance questionnaire.
Ric Lager
Lager & Company, Inc.
