The authors go on to offer up a technical review of what they see as a superior approach to risk assessments, based on the general financial concept of “value-at-risk.” Broadly speaking, value-at-risk can be understood as a statistical measure of the riskiness of financial entities or portfolios of assets. “Advisors tend to put clients into medium or higher elicited risks, but consistently medium or lower risk portfolios.” A Better Approach “We find that elicited risk is typically higher than revealed risk, in agreement with industry protocols treating elicited risk as an upper bound,” the analysis states. Given the increased degree of responsibility that individual workers now bear with respect to providing for their own retirement security, the analysis posits that many investors may not be taking as much investment risk as they reasonably could. Mark Reesor of Wilfrid Laurier University and Chuck Grace of the Ivey Business School.Īccording to the researchers, the systematic under-risking of portfolios implies a potential “efficiency cost” ultimately borne by individual investors and by society at large. The authors of the analysis include John Thompson of the University of British Columbia Longlong Feng of Western University in London, Ontario Adam Metzler and R.

In fact, the opposite appears to be true - and that may itself be a problem.

According to the paper’s authors, this conclusion pushes back against the suggestion that financial advisors are prone to exposing their clients to excess or undue risk. The headline finding of the new paper suggests that advisors are systemically investing their clients’ assets more conservatively than would be implied by their stated risk tolerance. Investors’ stated risk tolerances tend to be higher than those implied by the portfolios either they or their financial advisors construct, according to an analysis recently published by the Certified Financial Planner Board of Standards’ Financial Planning Review.

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