Financial DNA Risk Profile Mapping · 2017. 9. 17. · Client Maybe Motivated to Invest Higher Than...

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FinancialDNA®RiskProfileMapping

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UsingtheFinancialDNASummaryReportsNaturalBehaviorRiskReview

Step5

Step4

Step3

Step2

Step1

ReviewtheSummaryReport:FinancialPlanningInsightstoIdentifyRiskPropensityandRiskTolerance,andBehavioralBiases

ComparetheNaturalBehaviorPortfolioRiskGroupingtotheClientsCurrentPortfolio,GoalsandFinancialCapacity

HavetheClientCompletetheFinancialPersonalityDiscoverytoIdentifyLearnedRiskBehaviorsataDeeperLevel

IdentifytheRiskBehaviorGapandDeterminetheOptimalPortfolioConstructionBasedonDiscussionswiththeClient

ComparetheNaturalBehaviorRiskGroupingtotheLearnedBehaviorObservedInDiscussions

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RiskProfileConstructionUtilizingtheRightDataOperationalBestPractices

Upfront+OneTime:FinancialDNANaturalBehaviorDiscovery(Level1– Nature)

Makessubjectivediscoveryofriskprofilemoreobjective91%reliabilityReversion“goto”emotionalpointinpressureeventsituationsIndicateslong-termthinkingandemotionalcommitment

Annual:FinancialPersonalityDiscovery(Level2- Nurture)

Identifieschanginginfluencesofcurrentenvironment,experience,educationIdentifiespreferencesandpotentialrationalthinkingIndicatesshorttermdecision-making

Alignment+Aggregation

GapanalysisofnaturalandlearnedriskprofilestylesIdentifyattitudinalandperceptionshiftsAlignbehaviortoobjectivefactorsinfluencingportfolio–includingspendingDocumentandadjustIPS


SuitabilityRequiresConsiderationofManyRiskFactorsTheKeyElementsofFinancialDNARiskProfileDiscovery

KeyInvestmentRiskElements

TerminologyDefinitions FDNANaturalBehaviorDiscovery (Level1–Automatic,Instinctive,Hard-Wired)

FDNAFinancialPersonalityDiscovery(Level2– LearnedSituationalBehaviorBasedonExperiences,Education,Environment)

RiskNeed Riskrequiredtomeetfinancialgoals

FDNA IPS+FinancialPlanningSoftware


RiskCapacity Financial abilitytoenduretherisksofportfoliolosses



RiskPropensity Willingnesstotake risk Yes Yes

RiskTolerance Willingnesstolive withlosses Yes Yes

Loss Aversion Likelihoodtomaintaininvestmentsindownmarketsandnot crystalizelosses- Extent upset/emotionallosingmoneymorethanmakingit

Yes Yes

Risk Composure How clientwillbehaveinacrisis FDNAMarketMood Yes - FinancialEQ

RiskPerception/ProductPerception

Judgementaboutseverity ofriskincurrentclimate

Inherentlynotmeasuredasclientgutfeel

Inherentlynotmeasuredasclientgutfeel

RiskPreferences Personalevaluation ofriskpreference

No Yes

RiskProfile Aggregate oftheabovefactorsforachievinggoals

FDNA IPS+ClientConversation

FDNA IPS+ClientConversation


Client’sNaturalBehaviorPortfolioRiskGroupBasedonRiskPropensityandRiskTolerance

Forthosewhoshouldtakenoriskandbeincash


YourAssessmentoftheClient’sCurrent PortfolioRiskProfileGroup

YourAssessmentoftheClient’sPortfolioRiskNeedGrouptoAchieveGoals

YourAssessmentoftheClient’sPortfolioRiskGroupbasedonCurrentFinancialRiskCapacity

FinancialDNANaturalBehaviorPortfolioRiskGroup(basedonRiskPropensityandTolerance)

FinancialDNA LearnedBehaviorPortfolioRiskGroup (FromFinancialPersonalityDiscoveryorAdvisor’sAssessmentoftheclient)

OverallSelectedPortfolioRiskProfileGroup(SelectedbyAdvisorand Clientbasedondiscussionoftheaggregateofallscores)

BuildingthePlanandIPS– SummaryofClientsSelectedPortfolioRiskAlignedtoGoals,Capacity


Group 1 Group 2 Group 3 Group 4 Group 5 Group 6 Group 7

Pop. % in this category

<2% 2-18% 19-30% 31-69% 70-81% 82-98% >98%

Portfolio Structure

Capital Protection

Ultra-Conservative

Conservative Balanced Accumulation Growth Aggressive

AcceptableConservativePortfolio

AcceptableAggressivePortfolio

OnePortfolioRiskGrouping

Approach: 1.Do notsettheRiskProfilehigherthantheRiskNeed(toachievethegoals).

2.Buildtheportfoliowithin +/- 1GroupingoftheNaturalBehaviorPortfolioRiskProfileGroupasitreflectsthelongterm“goto”defaultbehavior.Subjectto:(i)Reviewtheclient’sRiskNeed(toachievegoals)andRiskCapacity(financialability)(ii)Theclient’sLearnedRiskBehaviorMotivations(experiences,education,environment)

BuildingaBehaviorCentered PortfolioWiththeClientMutuallyAgreeingtheOverallRiskProfile


InvestmentPortfolioRiskRewardAnalysisTheRiskNeedGroupLeveltoAchieveClient’sGoals

PortfolioRiskGroup

1.Capital

Protection

2.Ultra-

Conservative

3.Conservative

4.Balanced

5.Accumulation

6.Growth

7.Aggressive

1.InvestmentPortfolioRateofReturnAimtoAchieveGoals(WithoutBorrowing)

InLinewithCashDeposits

InLinewithorslightlybetterthancashdeposits

Excessofdepositsandpossiblybeatsinflation

Averagereturnshigherthandepositratesandinflation

Aboveaveragereturnsandhigherthandepositsorinflation

Significantlyhigherthandepositsandinflationwithhighreturnpotentialoverthelongterm

Thehighestreturnpotentialoverthelongerterm

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InvestmentPortfolioRiskRewardAnalysisRiskCapacityGroupLevelAlignedtoFinancialAbility

PortfolioRiskGroup

1.Capital

Protection

2.Ultra-

Conservative

3.Conservative

4.Balanced

5.Accumulation

6.Growth

7.Aggressive

2.AveragePortfolioFluctuationBased on5YearDataofMonthlyPricing

0%to±0.5% ±0.5%to±2% ±2%to±5% ±5%to±10%

±10%to±15% ±15%to±25%

±25% orgreater

3.PotentialShortTermPortfolioLoss(BasedonOuterLimits)

-1% -4% -10% -20% -30% -50% Fargreaterthan-50%

4.RiskofExpectedLoss

VeryLowRisk LowRisk LowtoMediumRisk

MediumRisk

MediumtoHighRisk

HighRisk VeryHighRisk

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PotentialLearnedRiskBehaviorMotivationsFactorsInfluencingClient’sRiskProfileLevel

PotentialMotivationsInfluencingClientInvestmentDecisions

ClientMaybeMotivatedtoInvestHigherThantheirNaturalRiskBehavior

ClientMaybeMotivatedtoInvestLowerThantheirNaturalRiskBehavior

1.MarketPerception Bullish Bearish

2.GoalSettingAttitude Ambitious Conservative

3. FinancialDecision-MakingConfidence High Low

4.Age Retirementin10+Years Close toRetirement

5.Financial Experiences Good – “RagstoRiches” Poor– “RichestoRags”

6.LifeExperiences PositiveFeeling NegativeMood

7.ValuesandBeliefs Belief intakingriskbuildswealth Belief thatinvestmentsareforlifesecurity

8.FinancialEducation HighInvestment Knowledge LowInvestmentKnowledge

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AssetAllocationDeterminedbyFirmBasedonCountry,ClientGoals,Capacity,RiskProfile,Policies

IndicativeStandardUSAInvestmentPortfolioAttributesforAllGroups(DefinedbyFirmnot DNABehavior)AMP Group1 AMPGroup2 AMPGroup2 AMP Group3 AMPGroup4 AMPGroup5 AMP Group6

PortfolioRiskGroup Group1 Group2 Group3 Group4 Group5 Group6 Group7

Capital Appreciation Portfolio:

CapitalProtection

Ultra-Conservative Conservative Balanced Accumulation Growth Aggressive

Defensive(CashandBonds) 90% 80% 60% 50% 40% 20% 10%Growth(Equities) 10% 20% 40% 50% 60% 80% 90%

FixedIncomeAllocation 90% 80% 60% 50% 40% 20% 10%DomesticBonds 45% 40% 25% 20% 15% 10% 5%InternationalBonds 0% 10% 10% 10% 10% 5% 5%Cash/Deposits 45% 30% 25% 20% 15% 5% 0%

EquityAllocation 10% 20% 40% 50% 60% 80% 90%DomesticEquity 10% 20% 30% 35% 40% 50% 55%InternationalEquity 0% 0% 10% 15% 20% 30% 35%

Strategic Portfolio:AlternativeInvestments 0% 0% 0% 0% 5% 15% 25%

OperatingPortfolio:

(Cash,ShortTermBonds) 100%

Investment Style:PassivevsActive 100%Passive 100%Passive 100%Passive 100%Passive 75%Passive 65% Passive 50%Passive

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BehavioralInvestmentPortfolioBasedonOverallRiskProfileGroup7

FixedIncomeAllocation 10%

DomesticBonds 5%

InternationalBonds 5%

Cash/Deposits 0%

EquityAllocation 70%

DomesticEquity 40%

InternationalEquity 30%

AlternativeInvestments 20%

TotalAssetAllocation 100%

TheBehavioralInvestmentPortfolioisanindicativemodelonly,andwillbevariedbyeachfirmgloballybasedontheirmarketsandinvestmentpolicies


GoalsBasedBehavioralPortfolioDesignAStrategicApproachBasedonNeedsandWants

• 3PortfolioBucketswith$$$basedongoals(needsandwants),financialabilityandRiskProfile

• DifferentPortfolioRiskProfileGroupingforeachBucket

1.StrategyAllocation

• AssetAllocationdeterminedforeachPortfolioBucket

• PassivevsActiveInvestingStylevariesforeachBucketdependingonPortfolioRiskGroupingandCapacity

2.AssetAllocation


Goals-BasedBehavioralPortfolioDesignStrategyAllocation

3PortfolioBucketsA“MentalAccounting”Approach

OperatingPortfolio(“Preservation”)

Preserveprincipal,generateincomeandminimizevolatility.Amount:Min6to12monthscashfordailyactivities(shorttermneedsandwants),upto3

to5yearscashforRetiredPerson.

(RiskPortfolioGrouping1)

CapitalAppreciation(“Accumulation”)

Managevolatilitybutfocusonappreciationtogeneratefuturepurchasingpowerforbuildingretirementcapital(longterm

needs).Amount:5to10yearhorizon.(RiskPortfolioGrouping2to7)

StrategicPortfolio(“Speculative”)

Designedtomeetspecialobjectives,generatehighreturnsorcashflowandarelessliquid.Amount:Long-termhorizonandcanbelostwithoutretirementdamage(longtermwants).

(RiskPortfolioGrouping5to7).

Subjecttolevelofcapitalandinvestmentexperience,education

Financial DNA Risk Profile Mapping · 2017. 9. 17. · Client Maybe Motivated to Invest Higher Than...

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