Tech Review: Free tools you can use to assess clients' ATR

This week, Mark Loosmore of AT8 Group looks at a pair of free ATR tools, one from Standard Life and the other from LV=/

One of the main topics of discussion we find ourselves involved in at the moment is the use of technology to support the identification of a client’s attitude to risk and the communication of risk to clients.

We have looked at several solutions provided by software houses to help advisers in this area – including systems like FinaMetrica and the recently rebranded eValue FE – but there are also ‘free’ solutions available from the product providers and platform operators. This week we take a look at two of these – one from Standard Life and one from LV=.

Standard Life products

Standard Life has a pair of tools available for use by IFAs. The first is available on the Platform and the second on the Extranet. The Platform questionnaire is the most graphically advanced of the two but has a limited question set. The Extranet has a more comprehensive attitude to risk (ATR) system but with a slightly older user interface – although this is only from a cosmetic point of view as it is still easy to use. For this article, we have concentrated on the Extranet questionnaire solution.

All the questions and algorithms behind the Standard Life questionnaire come from Oxford Risk Research and Analysis (ORRA). ORRA is a spin-out company from Oxford University that was founded in 2002. It has a strong reputation in psychometric analysis and is the intellect behind several provider systems.

Standard Life has taken ORRA’s intellectual property and created a pleasingly clean implementation.

The questionnaire sets out to measure five areas of a client’s attitude to risk:

• Perception – how the client perceives their risk behaviour
• Risk vs reward – how they view the trade-off between risk and return
• Future change – whether the client is likely to be more or less risky in the future
• Actual behaviour – how the client actually behaves when investing
• Time horizon – whether the client is investing for short or longer term

We have reviewed several systems in the market and there are some interesting approaches to the questions in this solution.

One question starts from the premise that the client is considering investing £20,000. The client is asked to select one investment from the six possibilities. Each option shows a potential upside and downside for the investment, for example £19,000 downside loss or £24,000 upside gain. Another option shows an £18,000 downside or £32,000 upside gain. The questions help to put a context around the potential impact of the investment choices and so begin to help frame the tolerance to risk quite effectively.

The questionnaire contains 17 questions and is not arduous to complete, taking 10 to 15 minutes depending on discussion (we believe that time spent on discussion is to be encouraged not discouraged). At the end of the process, the client is placed in one of five risk categories and a supporting word document report is produced.

Standard Life has been conscious that product providers may get accused of leading the adviser and client to a set answer and are careful to ensure that this tool is standalone. The firm also offers an asset allocation tool but to ensure that the ATR tool is perceived as independent, the two tools are not linked.

While this split is not the most efficient method, the asset allocation has space to enter the results of the ATR tool and it is only a single data item that then needs to be re-keyed.