Profiling the Risk Attitudes of Clients by Financial Advisors: The Effects of Framing on Response Validity

Abstract

The Australian Financial Services Reform Act (2001) now requires all registered financial planners to assess a client’s attitude towards investment risk as an integral part of establishing a ‘reasonable’ basis for investment advice to a client. However, the Act is silent on required procedures or acceptable minimum standards of risk assessment. Unfortunately, current methods for assessing a client’s attitudes towards investment risk are mostly informal, untested and ignore such behavioral biases as framing and other response anomalies. Unless controlled for, these anomalies can invert risk attitude responses and invalidate portfolio choices recommended to the client on the basis of this risk attitude assessment. This paper examines the potential effects of question framing on risk attitude assessments by financial planners and explores the implications for matching risk attitudes to standardized portfolio categories. Minimum industry standards are recommended as a way to deal with such behavioral issues in risk attitude assessment.

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