Abstract
A global study of over 200 professional financial advisors is undertaken to test how risk profile factors are used to make investment portfolio allocation recommendations. When presented with identical risk profile information, similar to what a competent financial advisor would normally collect from a prospective client, respondents are asked to recommend a portfolio allocation among equity, fixed income, and cash for five hypothetical client scenarios. The results find that financial advisors, using their professional judgment, inconsistently puzzled together the presented risk profile factors into portfolio recommendations, on average doing little more than applying the heuristic 100-minus-age rule to recommendations. These troubling results highlight the regulatory need for uniform risk profile evaluation guidance in fiduciary contexts. TOPICS:Portfolio construction, risk management, legal/regulatory/public policy
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