Years before there was Riskalyze or Pocket Risk, there was FinaMetrica, a comprehensive risk-profiling tool for use by advisors with their clients. The firm’s software and process were developed in Australia over a four-year period with the assistance of the University of New South Wales’ Applied Psychology department. The FinaMetrica system debuted in 1998, and the U.S. version was released in 2002. It is now available in seven different languages and is used by financial institutions and financial advisors around the globe. More than 770,000 FinaMetrica risk-tolerance tests have been completed over the years, which provides the firm with a comprehensive data set that competitors cannot match.

FinaMetrica has long claimed that its system provides a scientific assessment of an individual’s risk tolerance in simple language. The company claims that it uses psychometrics to ensure the validity and reliability of its output. Psychometrics is the theory and technique of psychological measurement, including the application of statistical and mathematical techniques to psychological testing.

Recently, the company gave me access to the latest version of its software, FinaMetrica Plus, which is essentially Version 3.0, the third major overhaul of its product. It was long overdue. The “old” FinaMetrica was showing its age. I have not done a written review of the product in years, but I’ve consulted with advisors who use it and stayed up to date.

The New FinaMetrica
The new version is, technologically speaking, a big step up from the previous one. For one thing, the overall experience is better. Some things that previously required manual data entry or the use of spreadsheets have now been automated. There are also more advisor options, making the product more flexible.

As part of the process, clients complete a risk-tolerance questionnaire and an optional demographic questionnaire and then view a risk profile report, so that’s what I did. Like the previous version, the new FinaMetrica has a comprehensive 25-question test. Spokesperson Tyler Nunnally told me that this questionnaire was intended primarily for wealth managers and other professionals who offer comprehensive advice to their clients.

Some of the questions were the type I’d expect, such as “When faced with a major financial decision, are you more concerned about the possible losses or the possible gains?” Other questions I found somewhat murky, for example, “Imagine you are in a job where you could choose whether to be paid in salary, commission or a mix of both. Which would you pick?” I understand what the question is probing for: How much of your pay are you willing to risk? But many non-risk factors might go into the decision as well.

I answered all of the questions by consciously answering as a more aggressive, risk-friendly investor. On a scale of 1 to 100, my score of 65 put me in the top 7% of risk takers on the FinaMetrica risk-tolerance scoring scale.

Next, I answered a different test with 12 questions. I was told this one was just for those who are doing investment work, advising on 401(k) plans and the like. The idea is still to put clients into a portfolio with the appropriate amount of risk, but without the type of in-depth talking points that a comprehensive engagement would cover. I had two primary objectives in taking the 12-question test. First, I wanted to see if my score was comparable in both tests. Second, I wanted to see how the experience differed in terms of test-taking and output.

On the 12-question test, I scored a 68, only slightly higher than on the previous test. Both results put me in risk group 6 of 7, and both indicated that my risk tolerance was in the top 7% of test takers.

The summary reports for both tests are similar, but the 25-question report provides greater detail. One addition to the report, the risk group report, is also used by competing products, such as Pocket Risk. FinaMetrica was wise to add similar capabilities. This tool does at least a couple of useful things. First, it compares your scores with those of others in your risk group. If you answered most of the questions the same way as other people in your group did, it validates the process. If you don’t, perhaps there is an issue that requires further probing. Second, the report looks at dispersion. If you fall into group 6 but a few of your answers are more characteristic of group 5, that’s not likely problematic. But if your scores are inconsistent, with some falling into a much lower risk group, that could be a red flag.

Another new feature is that the product can score spouses separately. This is not exactly new either. MoneyGuidePro, to cite one vendor, has offered it for a number of years. Behavioral research shows that it is much more effective to test spouses separately and make sure that one doesn’t influence the other’s answers. The advisor can then perform a gap analysis to see whether the partners’ risk tolerances overlap. If they do, the odds are that a risk score for the couple will be easily arrived at. If not, some negotiation will take place so that the advisor can arrive at a score acceptable for both.

My Take On FinaMetrica Plus
I’ve had some heated discussions with advisors and colleagues during the past several years about the merits of this tool. I would argue that part of FinaMetrica’s problem over the last decade has been that, until recently, it had no meaningful competition. In the software world, that often leads to complacency. The company’s attitude seems to have been, “We’ve figured this stuff out. We own the market. So if it ain’t broke, don’t fix it.” That’s all changed since Riskalyze and Pocket Risk have appeared and challenged FinaMetrica’s hold on the market. FinaMetrica’s speed and degree of change since then has been impressive. I don’t think that’s a coincidence.

For a number of years, the company had a 57-question risk tolerance test. Many clients simply refused to take it. The 25-question version is better, while the extra 12 questions give advisors flexibility to meet the needs of different client types. I found the shorter question set preferable and don’t think the additional questions add much to the process, although I’m sure FinaMetrica would disagree with me.

In the past, if an advisor wanted to perform a gap analysis or add a custom asset allocation and map it to a risk score, he or she had to use manual data entry or a spreadsheet. These things can now easily be done online, and much of the process is automated. The website, the reports and the user experience are all better.

So the question remains, is FinaMetrica materially better than its competitors? At least one of my colleagues seems to think FinaMetrica is the best, but I believe the answer is a bit more nuanced.

On the research/data side, the product has a few things going for it. First, FinaMetrica has a data set of more than 770,000 responses that it has gathered over the years. The company has also collected demographic data across many countries. As far as I know, it has the most comprehensive data set in the industry.

Company co-founders Geoff Davey and Paul Resnik are true risk-assessment evangelists. While all the competitors in the space are passionate folks who believe in their products, Aaron Klein (of Riskalyze) and John Ndege (of Pocket Risk) have products and interests that extend beyond what FinaMetrica does. A laser-like focus on a single area can be advantageous.

Yet another differentiator is the FinaMetrica process. In particular with wealthier clients, the longer, deeper consultation that FinaMetrica provides can offer a deeper, more engaging exploration of clients’ attitudes about risk for those advisors who are willing to commit to the extended process.
The argument for FinaMetrica is not a slam dunk, however. First, until recently, the company has trailed technologically. The competition has encouraged the company to respond, but it remains to be seen if this is sustainable. By now, I would expect the product to work with all leading CRM systems so that there is no need for advisors to re-key data. This has not happened yet.

For those who are looking for a quick read on a client’s risk tolerance to map them to a portfolio, Riskalyze might be a better choice. That company is rapidly building out integrations and offers additional tools, particularly at the enterprise level, that may add value.

Frankly, I would have been hard-pressed to recommend FinaMetrica a year or so ago because I felt the antiquated technology outweighed any added utility it had. It was like Betamax fighting VHS: FinaMetrica may have had a better methodology, but it was so cumbersome that too few advisors purchased it in the U.S. Better doesn’t always win in the marketplace, especially if there are offsetting liabilities. The convenience and the potential customer’s willingness to buy count too. FinaMetrica’s rather small market share in the U.S. indicates that something was amiss. Given its near monopoly in the space for over a decade, you would think its market share would be greater. The fact that it isn’t speaks volumes.

FinaMetrica Plus finally propels the platform into the 21st century. It is more flexible and offers a better user experience. The core intellectual property to make it successful has always been there. The question is, will the company continue to build on the technological improvements of the new platform? If it does, it will likely be successful in drawing new advisors in the U.S.