The BRS presents a modern, more holistic, risk profile. For traditional face-to-face advice it offers richer conversations that clients can more easily relate to. Furthermore it enables the scaling of advice into the digital and hybrid arena without the consequential trade-off of a deep understanding of the client.
The BRS is the only methodology currently on the market that caters for BOTH a subject's stable risk profile AND their propensity to behaviourally diverge from that profile at a point in the future.
Existing profiling tools currently available in the UK measure the subject's stable risk profile via a Risk Tolerance Questionnaire (RTQ), often referred to as a psychometric. This is great and can be easily validated but the problem is the very fact that it is a stable measure.
For most of the term of an investment, this measure can be a reliable means of profiling, however it cannot cater for how the subject behaves, especially when anxious. Behaviours, on the other hand, by definition, are NOT stable. They are environmental. Yet it will invariably be behaviours that steer a subject to suddenly making a poor choice in the future. Thus Be-IQ measures the subject's behaviours to predict the propensity they have to change risk profile at a future point, when they are emotionally stressed/anxious.
The BRS creates a baseline risk tolerance measured using the RTQ component (10-question psychometric). It then takes a separate, deliberately abstracted measure of the subject's loss aversion (LA).
Our research over the last six years has consistently shown there is an inverse relationship between a subject's RTQ and LA. This makes sense given loss aversion is a significant component of risk tolerance. Both results are translated to a 1-100 scale and the LA result is inverted to Loss Tolerance (LT) thereby running low to high as with the RTQ. The two scores are compared with their respective weightings being determined by their relative reliability scores. Finally the weighted result is further adjusted if the subject's present bias (PB) result varies from the mean of the population.
In roughly 85% of cases, the subject's LT will arrive at a lower score than their RTQ. This delivers a risk 'band' which can be considered as the subject's risk range depending on the goal. With the RTQ representing the subject's 'typical' risk tolerance and the LT representing their behavioural propensity when anxious. The subject's BRS is the reliability-weighted and then present bias-adjusted average of these two scores. If the subject has a particularly short term present bias, the BRS will move to the lower end of the risk range and vice versa.
Be-IQ’s Profiler service is the client facing responsive website that presents the three constituent components of the the BRS in a highly interactive experience.
The RTQ component is presented as a traditional questionnaire whilst the two behavioural measures, loss aversion and present bias, are presented as visualised situational choices or games. Testing the subject via questionnaire AND situational games is fundamental and crucial.
Asking a young male subject how good a driver he is may deliver an honest and consistent (stable) response. Yet in most cases an inaccurate one. Only by visualising or simulating aspects of the choices he makes whilst driving, can an accurate measure of his driving behaviour be measured.
In short the gamified experience of the BRS is a crucial element of its’ accuracy. A happy outcome of this approach happens to be that clients find the BRS more engaging and thus also lends itself well to client onboarding and even lead generation.
A client's BRS results are accessed via Be-IQ’s Hub service where the constituent data points are visualised into an easy to understand risk range. This range represents the gap between the subjects RTQ and LT results, within which sits the BRS itself.
The BRS represents the overall risk profile score, and is the element we use to determine specific asset allocation and risk attributes. However, as we produce each component of the BRS as well, the difference between the RTQ and LT can be used as the risk range for the overall portfolios that are held by a client. In other words, they define the tolerance range in terms of utilising different portfolio strategies to achieve short, medium, and long term goals. The larger the risk range, the more broadly one can apply a diverse portfolio design applying higher risk attributes to longer term objectives.
Be-IQ Hub generates a five-page detailed PDF client report which can be shared by the Adviser. The client report is our plain language document that reports and explains the clients results in full.
From a summary page on the front to high level interpretations of the underlying measures and resultant target asset allocations and projected returns.
The current design provides quantitative measures that reflect portfolio risk and reward characteristics, and include drawdown, and volatility on the risk side, and a inflation linked return target on the reward side.
The document also summaries the subjects actual responses through the assessment journey, with inconsistencies highlighted within each test. Inconsistencies have an impact on reliability. They also provide some measure of engagement, and can help advisers recognise areas where clients might need additional help in understanding risk.
The BRS is mapped to a representative tactical asset allocation model consisting of cash, bonds, and equity indices. We build, in conjunction with our investment consultant partner, optimised portfolios for short, medium and long-term holding periods.
We map each BRS value against the appropriate portfolio based on a series of risk metrics, inclusive of annualised volatility, maximum drawdown, and value at risk for 95% and 99% confidence levels. We illustrate for each portfolio target returns, and maximum and minimum simulated returns. Each portfolio is reviewed bi-annually by our consultant utilising index data sourced from Morningstar and Bloomberg to ensure the right risk parameters are assigned. The BRS, representing as it does a subjects holistic risk tolerance and range, has been mapped to xx asset classes.
We can offer a bespoke risk mapping service for clients who need to map their own model portfolios to the BRS.
We deliver this with the assistance of our investment consultancy partner. For each portfolio provided we will calculate all risk metrics for each holding period. We will then utilise the values produced for volatility, drawdown, and value at risk to map each portfolio against both an exact BRS value, as well as a BRS range. We can map complex portfolio designs that include alternative asset classes as well as traditional ones.
We intend to store and retain for you to retrieve all of the results that have been attained by your client each time they interact with the risk profiling system.
We will provide you with the means to compare previous values on their BRS and all its underlying components against previous ones and will highlight differences between the test results of the current year and the previous one.
We will highlight all significant differences between the client’s overall BRS and underlying components so that it is clear where deviations may have occurred that have impacted the overall result.
Our present approach toward integration is to allow advisers to build a CSV file output from their CRM system that they can automatically upload into our dashboard. When this file is uploaded properly, new individual IDs will be created for each client and these can be linked to both an adviser firm and an individual adviser.
In terms of taking data from our system into your CRM, we have a number of application interfaces available which your IT group can configure to extract any amount of data about an individual user. This can include all of the elements of the risk profile as individual alphanumeric values that can be input into custom fields you create in your own database, or as full report that can be attached to a client CRM record. We will be developing a number of pre-configured APIs for back office systems that will do the latter automatically.