In the first study of its kind in the UK, AXA Wealth has identified that two thirds of consumers have a significant gap between their perceived investment risk appetite and their actual risk investment appetite.
Following the FSA’s Assessing Suitability paper earlier in the year and the IMA’s reclassification of the balanced managed sector, the credit crunch has thrown the notion of risk profiling and how advisers manage this with their clients, into sharp relief. Set against this backdrop, AXA Wealth Self is the first detailed study of its kind that seeks to identify what people believe their attitude to risk is, and what it actually is.
Published in conjunction with leading academic Professor Adrian Furnham of University College London, the study asked consumers to rate their perceived attitude to investment risk on a scale of one to seven, where one is very cautious and seven adventurous. Respondents were then asked to complete the AXA Wealth 14-step risk profiling tool to identify any disparity between their perceived and actual appetite. Finally, a ‘disconnect’ score was calculated, which is the difference between what people perceive their appetite for risk to be and what it actually is.
At a time of unprecedented market volatility, the AXA Wealth Self study reveals a risk adverse nation, which appears to be more concerned with preserving capital rather than delivering growth, and therefore underlining the important role an adviser plays.
Key findings from the research reveal a significant mismatch between consumers’ perceived risk attitude and their actual profile. A quarter (25%) thought they were in the lowest risk category, representing a real danger to their long term investment prospects. However, having taken the risk profiling tool, only one in twenty (6%) fell into this category.
Overall two thirds (64%) of consumers are disconnected from their attitude to risk. A third of respondents (33%) have a stronger appetite for risk than they think, whilst 31% are less risky than they perceive themselves to be. These have equally dangerous implications dependent on the individual’s investment objectives.
Mike Kellard, chief executive officer, AXA Wealth, commented: “Appreciation of risk is paramount in any client-adviser relationship. This difference between perceived and actual self is critical to understand; if individuals get this wrong, there is likely to be a knock on effect and impact on investment behaviour, and in turn, likelihood of meeting financial goals.
“Clients should be aware of the things that should be taken into consideration when assessing risk e.g. time horizon, wealth, different financial goals, capacity for loss, whether they are taking more risk (as their risk profile would determine) than they need to do or too little risk for their goals. This is made even more difficult given the names of funds and risk profiles in the industry are not aligned and can arguably be misleading in some cases. All of these underline the need for consumers to seek professional advice.”
“In today’s volatile markets, professional financial advice has never been more important. The risk profiling tool should be used as a starting point for further discussions between adviser and their client so their preferences can be mapped accurately, and then updated in the future as appropriate. Relying solely on these tools is dangerous, with advice key to every part of the journey.”
Professor Adrian Furnham commented: “Money is a great source of anxiety for many people. Everyone knows they have to save for the future and that investing wisely is important for well being and security. If UK consumers are disconnected in their appetite for risk, it could have huge connotations for asset allocation decisions and growth expectations.”
The AXA Wealth Self study forms part of a new adviser initiative, supported with a new suite of risk profiling tools, to raise awareness of the importance of understanding risk, and its impact on investment behaviour, our ability to meet certain investment goals, and overall well-being.
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