Monday, August 18, 2014

Do advisors help clients manage risk?

Estimating Risk Tolerance: The Degree of Accuracy and the Paramorphic Representations of the Estimate Michael J. Roszkowski  and John Grable

According to this research , the answer is no.Using a sample of 386 financial advisors and 458 of their clients, the study sought to determine how effective financial advisors and clients are at estimating risk-tolerance, and to test how well items from a risk tolerance test and demographic information can represent the judgmental process used to formulate these estimates (a “paramorphic representation” of the decision). The client’s self rating and the advisor’s rating of the client produced a Pearson correlation of .40. Moreover, the advisor’s rating correlated at about the same level (r =.41) with the client’s score on a test of risk tolerance. The data also showed that when it comes to estimating one’s own risk tolerance, clients are better than are advisors at this task. The estimates could be represented paramorphically in terms of a few variables. It was observed that advisors assign too much diagnostic value to certain demographic variables in estimating client risk tolerance. Keywords: Risk tolerance, paramorphic representation, financial advisors . Read the paper here

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