Do as I Say, Not as I Do: An Analysis of Portfolio Development Recommendations Made by Financial Advisors

Abstract

A survey of over 200 financial professionals was used to determine how financial advisors assess, rank, and use client characteristics and risk-profiling inputs when developing asset allocation recommendations. Findings from this study suggest that in a scenario-free context, financial advisors rank a client’s time horizon as the most important risk-profiling input. However, when viewed in the context of a specific client scenario, financial advisors appear to alter the importance of certain risk-profiling inputs, becoming overly reliant upon a client’s age and employment status. Results from this study also show that financial advisors are somewhat inconsistent in their use of risk-profiling inputs across client scenarios. Results do show that older financial advisors with more experience are more apt to consistently recommend portfolios with higher equity ratios than their younger counterparts.

TOPICS: Portfolio construction, risk management, wealth management

Key Findings

• • In a client neutral context, financial advisors rank time horizon, liquidity need, risk capacity, risk need, and risk tolerance as important risk-profiling inputs.

• • However, when faced with client asset allocation choices, financial advisors appear to use other risk-profiling inputs to shape portfolio recommendations.

• • Although not a recommended practice, financial advisor seem to be overly reliant on the use of client age and employment status when developing asset allocation recommendations.