Practice Management
How to fix your broken client questionnaire
  • Client questionnaires typically don’t measure what’s needed to build satisfaction.
  • Questionnaires should be retooled to get at exuberance, regret and overconfidence – not views of market volatility.
  • Not understanding clients’ true goals puts RIAs at risk.

Markets turn volatile and a client who is normally calm panics. Or perhaps a self-described “risk-adverse” client grumbles that their returns should have been larger. These are just a couple of familiar scenes for many RIAs.

How do these situations happen? After all, most RIAs ask clients to fill out lengthy risk-tolerance questionnaires specifically designed to avoid this. By asking clients questions like, “If the market were to decline 30% or more, how would you react?” advisors measure how much volatility a client can stomach and build a portfolio to match. Or so they think.

The problem isn’t the client, though, and it’s probably not even the portfolio. The problem is likely your questionnaire, Meir Statman, professor of finance at Santa Clara University and author of “Finance for Normal People,” told Capital Group.

“Most (risk-tolerance) questionnaires are really trite” and don’t measure what’s important when building portfolios, Statman says. Most questionnaires measure how much volatility clients think they can accept, and miss much more important factors such as exuberance, regret and overconfidence. Fewer questionnaires, still, get at clients’ true goals. Advisors need to “have a better sense of what risk is,” he adds. And that’s not volatility.

Client questionnaire 2.0

Research suggesting client questionnaires are flawed holds existential questions for RIAs. Here’s why: The pseudo-precision of measuring clients’ perception of volatility is the fundamental starting point of many firms’ asset allocation process.

Luckily, there may be ways to vastly improve the questionnaire using behavioral finance. Meanwhile, some RIA firms are already retooling the process so conversations move away from “How’s my portfolio doing compared with the market?” to “How am I progressing toward my goals?”

What’s at stake

Questionnaires could create big blind spots for RIAs, who falsely feel that they know what clients expect. Once the nearly decade-long bull market ends, clients’ true beliefs might become known. Already, clients cite advisors’ lack of understanding of their risk tolerance as the sixth-most frequent reason to leave their advisor out of 16 variables asked about, says Spectrem Group. Some other reasons cited are indirectly related to not connecting goals with portfolios, such as “underperforming compared to the overall stock market.”

Understanding risk is important to clients.
Reasons clients change advisors (more than one choice could be selected)



Not returning phone calls in a timely manner


Not providing me with good ideas and advice


Not being proactive in contacting me


Not responding to emails in a timely manner


Underperforming compared to the overall stock market


Doesn’t understand my risk tolerance


Source: Spectrem Group, 2018

Steps to a better questionnaire

There are telltale signs your questionnaire isn’t truly measuring your clients’ risk tolerance. If you’re hearing from clients panicking when the market posts a big swing or that their friends’ portfolios are “doing better,” these might be signs your questionnaire could be improved, Statman says.

Statman outlines three steps to improve your client questionnaire:

Step 1: Decide if you want to measure risk tolerance in the questionnaire.

For some advisors, the questionnaire is really just a “protection against lawsuits,” Statman says. Some advisors are asking questions to inoculate themselves against challenges later. If a client indicates that they’re an aggressive investor and the market declines 20%, the advisor can point to the client’s signature on the form, Statman says. Some items on many questionnaires are more like legal disclosures than requests for the client’s opinion.

For example, many questionnaires contain statements like, “Foreign investments involve risks that are in addition to those of U.S. investments, including political and economic risks, as well as the risk of currency fluctuations.” But in reality foreign stocks can help reduce risk in a portfolio by adding non-U.S. economic exposure, Statman says.

Retooling a questionnaire requires advisors to move away from using them as a liability-controlling tool to one that helps clients.

In the case of international investing, Statman suggests replacing the disclosure with education, like, “Over time, international markets and asset classes within those markets have not always moved in unison with the U.S. market. U.S. stocks have outperformed international stocks during some periods, and international stocks have outperformed U.S. stocks during other periods. Investing a portion of a portfolio in international stocks and bonds reduces risk.”

With that understanding, you might ask the client, “Which statement best reflects your view on international investing?” and then ask the client to rate if they are very comfortable or uneasy with investing outside the U.S.

Step 2: Measure what really matters: goals, not volatility.

The idea that risk and volatility are synonymous is prevalent among advisors. But confusing the two very different concepts leaves advisors frustrated and clients disappointed, Statman says. Risk isn’t a client’s appetite for volatility, but rather the odds of not reaching their goals.

Statman cites the example of a client who is completely invested in short-term Treasuries notes. Certainly, the volatility of the portfolio would be low. But the risk the client faces is actually very high, as the portfolio will likely not generate returns to meet wants and goals.

Statman encourages advisors to review their questionnaires and instead find ways to gauge factors that are more important than volatility, such as:

  • Exuberance. Here’s a common questionnaire item: “Imagine a steep stock market decline, as during the 2008–09 financial crisis when the S&P 500 index plunged more than 40% in six months. How would you react?”

    If a client says they would increase their stock investments during such a period, some RIAs might peg that person as risk tolerant and dial up the exposure to equity in the allocation. That could be the wrong move, though, since the question doesn’t measure risk capacity. The question hints at the client’s self-reported current level of fear or exuberance. There’s little value in this for long-term planning, Statman says, as this question is highly swayed by recent events in the market.

    Instead, it’s better to get directly at exuberance. Ask clients what they think the market will do in the next 12 months, in terms of returns and volatility. If an investor says returns will be high and volatility low, the RIA knows this investor might be exuberant. Similarly, a view that returns will be low and volatility high is a sign the client is fearful. This is useful information.

    Use this information to help the exuberant client better understand why adding more stock isn’t necessarily in their long-term best interest. Similarly, help show a fearful client how declines are usually short lived.

  • Regret. “Regret can really be as painful as risk,” Statman says, and the emotion can be a powerful force in how clients perceive the job you, as an advisor, are doing.

    Again, risk questionnaires are misleading. They often ask something like, “You lost money investing in ABC Co. five years ago. The company has been restructured and the outlook looks promising. Would you invest in it now?”

    Clients who answer “no” are usually viewed as being risk adverse and the allocation to equity is dialed down, Statman says. But again, the questionnaire isn’t measuring risk, but regret, which is very different. The client who answers “no” is likely someone who mulls over past decisions and second-guesses themselves if another move, in hindsight, might have been better. Putting clients like this in a low-risk portfolio could backfire if years later they look back and realize they could have had more money if they’d owned more equity.

    Statman instead suggests asking, “Whenever you make a choice, do you feel the pain of regret if another alternative has done better than the alternative you have chosen?” Clients who answer “yes” should be shown how market returns can greatly fluctuate and might not always deliver expected returns in a predictable pattern. You’ll want to know if this client tends to regret choices, even if they were prudent at the time.

  • Overconfidence. Questionnaires often ask, “How much confidence do you have in your ability to make good financial decisions?”

    Clients with large amounts of faith in their financial ability are often viewed as being risk tolerant. There is a correlation between confidence and risk tolerance: Confident investors can typically stomach higher risk portfolios, Statman says.

    But the challenge for advisors is the fact that confidence can turn into overconfidence. Overconfidence causes people to think they can tolerate more risk than they actually can. This can lead clients to push back on prudent advice in building appropriate portfolios. For example, overconfident investors will flinch at the idea of a diversified portfolio, instead preferring to trade in and out of stocks they think will do better. Why own 30 stocks when you can just own the best one?

    That’s why it’s valuable for advisors to know if a client is overconfident. To get at that, Statman suggests rephrasing the question to: “Some people believe that they can pick investments that would earn higher-than-average returns. Other people believe that they are unable to do so. What is your belief?”

Step 3: Customize the questionnaire based on net worth, and focus on goals.

The cookie-cutter nature of questionnaires can limit their effectiveness, especially with high net worth clients. For example, many questionnaires ask something like, “Would you want to make an investment where you have a 50-50 chance for a $3,639 loss or a $4,229 gain?” Statman says.

But this question is flawed in several ways. For one, it urges investors to focus solely on investment results in isolation, paying no attention to the goal of the investment. More importantly, though, the question doesn’t factor in the fact that a person willing to lose $3,639 on a $10,000 portfolio isn’t willing to lose the same percentage on a $5 million portfolio.

Statman suggests rephrasing this question away from dollar values and toward changes in standards of living, to something like: “Suppose you are given an opportunity to replace your current investment portfolio with a new portfolio. The new portfolio has a 50-50 chance of increasing your standard of living by 50% during your lifetime. However, it also has a 50-50 chance of reducing your standard of living by X% during your lifetime. What is the maximum X% reduction in standard of living you are willing to accept?”

Clients’ responses can be very useful in putting their risk tolerance in perspective with goals. As a benchmark, Statman found that on average, U.S. investors will tolerate a 12.6% reduction in their standard of living for a 50-50 chance at a 50% increase.

A better way? A case study

Some progressive RIAs, seeing the shortfalls in traditional questionnaires, are already retooling the process and looking for a better way.

WMBC, a Lake Forest, Calif.-based RIA with more than $100 million under management (60% in high net worth), for years gave clients a paper “Financial Planning Questionnaire” that asked standard questions. Those questions included asking about how clients would feel about their portfolios dropping in value, their investment time horizon and their past experiences with investment products. Advisors would use those questions to put an investor in, say, a “moderate” portfolio.

Over the years, WMBC realized the firm was doing more than just building portfolios and “those areas we focused on gave the clients much more satisfaction than their rate of return,” says David Coles, chief operating officer of WMBC. “We realized that we needed to create a process that brought these areas to the forefront of our work with the client and shift their mindset and ours to a broader view of their wealth.”

So while the questionnaire gave WMBC advisors insight into the clients’ feelings on market fluctuations, it didn’t explain the “why” driving the answers, Coles says. “Why could they only stomach a 10% loss? What other factors did they take into account when determining that answer?” he says.

So this year, WMBC along with behavioral professionals created a new questionnaire that addressed the client’s entire personal situation and even goes beyond money. The questionnaire probes clients’ emotions, health, external conditions and personal resources.

Questions are very different from what’s asked on a traditional questionnaire. It asks things like, “How much time spent discussing wealth with your family is stressful?” and “How much of the time do you find your job interesting?” Clients then answer questions on a Likert scale of one to 10.

After the client ranks their feelings toward the various topics, the firm summarizes the results for each aspect of wealth and life. “These scores are reviewed with the client to identify opportunities for change and offer direction to the advisor as to what financial system will bring about the client’s desired changes, not just the volatility range they think they want,” Coles says.

WMBC hopes to build out the system and make it available to other RIAs.

More advisors who follow suit and upgrade questionnaires so portfolios can be built to address goals, not just control for volatility, will likely find more satisfaction with clients, Statman says.

“The question really is, ‘What matters to you?’ These kinds of things will really guide you to the portfolios, not people’s attitudes towards risk,” Statman says. “Risk is like one of the cars of a train, but it’s not the engine of the train. The engine of the train is your aspirations.”

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