Nothing like a little competition to prod some good work.

I am a bit of a research junkie, so last month in Baltimore where I attended this year’s FPA BE, the national conference of the Financial Planning Association, I was excited to see more interaction with the academic community and be exposed to some of the latest research useful to financial planners. 

The Journal of Financial Planning conducted a competition for financial planning research. Nine papers were selected by a blind peer review process. Three separate sessions were held in which researchers presented findings from their latest work. The research presentations were judged onsite by a panel. Two winners received cash and an award.

All nine were of interest, but I was not a judge, so I listened solely from the perspective of a financial planner looking for information I can use in my practice. A handful of the studies stood out to me.

One was named winner in the Best Applied Research category. Funded by the Ontario Securities Commission of Canada, “A Review of Risk Profiling Practices” was presented by Shawn Brayman of PlanPlus Inc., a Canadian financial planning software company.

PlanPlus attempted to examine a slew of risk tolerance questionnaires but due to a variety of factors, including a lack of cooperation among institutions and an inability to examine all questions or the scoring model, examined just 36 questionnaires.  

The headline result was that the quality of risk tolerance questionnaires covered a very wide range. This was not terribly surprising to me. What was a bit surprising was just how bad the bad ones were.

For instance, of the 36, less than twenty asked about basic items like age, income, net worth, investment knowledge, experience or goals. The authors described pervasive issues with the questions that were asked such as too few questions, confusing and poorly worded questions, and arbitrary or bad scoring models. They characterized three of the questionnaires as ”dangerous.”

Like many practitioners, I do not dispute the need to assess a client’s risk profile, but I have harbored some anxiety about putting too much emphasis on the results of questionnaires when constructing portfolios. There are too many other relevant variables. Our angst seems justified.

Another risk related study got the audience thinking. In “Who Exhibits Time Varying Risk Aversion?”, presented by Michael Finke, dean and chief academic officer at The American College, the authors looked at a pool of 29,000 retirement plan participants who used the exact same risk questionnaire from January 2006 through October 2012 to assess the relationship between the scores and the level of the S&P 500.

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