The fundamental problem is that a client?s attitude to, and perceptions of risk are being measured, and these attitudes and perceptions can change. For example, when investment markets rise people feel more optimistic, and when they fall people feel more pessimistic. In addition, whilst there may be different categories of risk profiles, each person has a different understanding of what a category might mean to them.

To demonstrate this, Xchange Solutions recently conducted research into individual understanding of risk profiles by surveying 231 clients of a financial planning business, countrywide. In the survey, clients were simply asked to identify their own risk profile out of three options: aggressive, balanced or conservative. They were then asked to indicate what annual return they would expect from their investments over the next five years.

How risky is risky?

The responses showed that 29 percent of respondents saw themselves as conservative, 65 percent as balanced and 11 percent as aggressive. However, within each category the return expectations of each client were radically different. In the conservative category, the lowest expected return was three percent per annum and the highest was 35 percent per annum, with an average expected return of 12.5 percent.

The balanced category had a lowest expected annual return of five percent and a high of 55 percent, with the average being 16.6 percent. In the aggressive category the low was 12 percent, the high was 50 percent and the average was 23.4 percent. Apart from the enormous range of expectations within each category, there were obviously major anomalies between categories, where people who classified themselves as aggressive had lower expected returns than those who classified themselves as conservative.