Measuring Financial Advice: Aligning Client Elicited and Revealed Risk

51 Pages Posted: 24 May 2021

See all articles by John R.J. Thompson

John R.J. Thompson

Wilfrid Laurier University; University of Western Ontario

Longlong Feng

Wilfrid Laurier University

R. Mark Reesor

Wilfrid Laurier University; University of Western Ontario

Chuck Grace

University of Western Ontario - Richard Ivey School of Business

Adam Metzler

Wilfrid Laurier University - Department of Mathematics

Date Written: May 21, 2021

Abstract

Financial advisors use questionnaires and discussions with clients to determine a suitable portfolio of assets that will allow clients to reach their investment objectives. Financial institutions assign risk ratings to each security they offer, and those ratings are used to guide clients and advisors to choose an investment portfolio risk that suits their stated risk tolerance. This paper compares client Know Your Client (KYC) profile risk allocations to their investment portfolio risk selections using a value-at-risk discrepancy methodology. Value-at-risk is used to measure elicited and revealed risk to show whether clients are over-risked or under-risked, changes in KYC risk lead to changes in portfolio configuration, and cash flow affects a client's portfolio risk. We demonstrate the effectiveness of value-at-risk at measuring clients' elicited and revealed risk on a dataset provided by a private Canadian financial dealership of over 50,000 accounts for over 27,000 clients and 300 advisors. By measuring both elicited and revealed risk using the same measure, we can determine how well a client's portfolio aligns with their stated goals. We believe that using value-at-risk to measure client risk provides valuable insight to advisors to ensure that their practice is KYC compliant, to better tailor their client portfolios to stated goals, communicate advice to clients to either align their portfolios to stated goals or refresh their goals, and to monitor changes to the clients' risk positions across their practice.

Keywords: Risk measures, Value-at-risk, Portfolio management, Financial advice, Client-advisor relationship

JEL Classification: G40,G41,D81

Suggested Citation

Thompson, John R.J. and Feng, Longlong and Reesor, R. Mark and Grace, Chuck and Metzler, Adam, Measuring Financial Advice: Aligning Client Elicited and Revealed Risk (May 21, 2021). Available at SSRN: https://ssrn.com/abstract=3850892 or http://dx.doi.org/10.2139/ssrn.3850892

John R.J. Thompson (Contact Author)

Wilfrid Laurier University ( email )

75 University Avenue West
Waterloo, Ontario N2L 3C5
Canada

University of Western Ontario ( email )

1151 Richmond Street
Suite 2
London, Ontario N6A 5B8
Canada

Longlong Feng

Wilfrid Laurier University ( email )

75 University Ave W
waterloo, ontario N2L 3C5
Canada

HOME PAGE: http://https://www.linkedin.com/in/longlongfeng/

R. Mark Reesor

Wilfrid Laurier University ( email )

75 University Ave W
waterloo, ontario N2L 3C5
Canada

University of Western Ontario ( email )

1151 Richmond Street
Suite 2
London, Ontario N6A 5B8
Canada

Chuck Grace

University of Western Ontario - Richard Ivey School of Business ( email )

1151 Richmond Street North
London, Ontario N6A 3K7
Canada

Adam Metzler

Wilfrid Laurier University - Department of Mathematics ( email )

Canada

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