Paul Resnik, Co-founder of
the popular risk profiling software FinaMetrica talks about how measuring risk
tolerance of clients is a must for every adviser.
What inspired you to launch this software?
We started work on this software in 1994. There was a mismatch between recommendation and clients needs and nobody was paying attention to this issue. If you have products that don’t meet client needs then your customers are likely to be unhappy and they often withdraw their money early. They get unhappy when markets are bad. To check mis-selling, regulators are now are imposing standards that are much lower than ours. We were able to spot this problem many years ago by introducing Fina- Metrica.
How is your software different from the existing packages available in India?
We are independent and have no biases. We are present in 20 markets. We have a 90 percent subscription renewal rate. Our software is robust and professional which none of the softwares in India could match. We don’t provide any scheme recommendation. We take very careful decisions on who we work with. Most of our clients are early adopters. We help advisers and fund managers take the surprise element out of investments.
Can you take us through the features available in your package?
We ask 25 psychometric questions to assess peoples risk tolerance which helps in finding out the unique characteristics of each client. It’s an empirically back tested method. It is a web-based software which can be used from anywhere. The results are produced instantly.
How did your software help your clients during the financial crisis?
Despite the market meltdown, there was no dissatisfaction among our clients. They realized the benefits of using FinaMetrica. Our customers and advisers have largely sailed off this period smoothly.
Do you revise the questions which are used to gauge people risk tolerance?
We started with sixty questions. We added and deleted some of them. It took us four years to prepare these 25 questions to which we have stuck for many years now.
Peoples risk appetite may change from time to time. How do you capture such information?
What you are describing is risk perception. We use language very carefully in our software. Risk tolerance is a trait not a state. You may like physical risk. You think mountain climbing, paragliding and bungee jumping is good. That doesn’t change. Knowing that bungee jumping is dangerous and this version is safer than other version then is a perception of risk. The psychological attributes in financial risk tolerance cannot change but environment changes and how you judge it changes. That’s the critical reason why we use psychometric test. Non-psychometric tests are not that effective. Most of the risk profiling tools available in the market are designed to get through this process as fast as possible to provide investment recommendations. This software is predominantly targeted towards those want to give advice.
This is the first part of the interview.
