The Risk Tolerance Questionnaire Problem: Why It Constrains Portfolio Construction

Today we’re thinking about an analogy from Martin Tarlie‘s recent podcast with Franklin J. Parker, CFA at CFA Society Dallas/Fort Worth about ‘The Risk Tolerance Questionnaire Problem’:

“Risk tolerance questionnaires, I liken it to going to the doctor, and you fill all this paperwork out at intake, and you go to the doctor and you explain your symptoms, and she says, ‘okay, yeah, we’ll run these tests, and they run all these tests, and she gets the tests back, she looks at the results and she says, ‘Okay, I know what’s wrong. I know how to fix it, but unfortunately, the pain tolerance questionnaire you filled out at intake doesn’t let me treat you.’ You’d be like, what!? No, fix the problem.’ Clearly, you know, we need to talk about my pain tolerance, but that shouldn’t be the only metric a doctor uses to treat my ailments, right? And I feel like that’s what the financial industry has done, with risk tolerance questionnaires. We got all this great financial planning work, we know all the solutions we got, but sorry, your risk tolerance questionnaire says we can’t give you the portfolio that you really need. I find it just maddening.”

Curious how others are thinking about this and how they’re approaching it with clients.

#goalsbasedinvesting #risktolerancequestionnaires #cfa