A Case Study


For years, the retirement industry has been trying to assess peoples’ investment risk tolerance using a variety of methods. However, these methods have proven to be ineffective at assessing risk, and have instead both heightened investor anxiety and negatively impacted the usefulness of an advisor’s planning session. This is due in part to how these questionnaires are developed: they are heavily reliant on techniques based on mathematics, (including story problems) complicated data tables and investment jargon. Standard risk assessment tools end up not only being a missed opportunity to better connect advisor and investor, but further exacerbate existing challenges to engagement.

The consequence of this is significant. Anxiety around retirement planning and savings behavior is a already a barrier to engagement. We know from our research with DC participants that one’s self confidence and knowledge about financial topics contributes to better decision-making. The other critical factor that impacts engagement is trust — trust in oneself as well as the people and institutions we are reliant on for investing and managing those investments.

When we combine the factors that drive engagement: confidence and trust, they become a powerful index that we call “Financial Courage.” Financial Courage is directly linked to improved financial decision-making, including higher savings rates.

A big part of what we do at NARPP is create communications experiences that are grounded in behavioral finance and human centered design. This unique, interdisciplinary approach that has proven extremely effective at building participant self-confidence and trust. We applied this same method to develop a new way to assess and measure risk tolerance.

The goal was to create a questionnaire that would more accurately assess a person’s risk comfort zone through a more human centered approach – one that takes the end user’s needs into account and eliminates jargon, complicated math and other barriers to positive cognitive and behavioral change.

We were confident that we could build a better model for approximating one’s risk tolerance, but we were surprised to discover that a more accurate assessment of a participant’s risk tolerance actually increases their trust in their advisor.

The result is not only a new behaviorally effective risk assessment tool, but just as important —a new tool for increasing trust with the advisor or administrator of the tool. A risk assessment tool, that prioritizes the emotional mindset, existing biases, and cognitive barriers of the end user — demonstrates empathy and thereby helps to build the requisite trust that facilitates engagement.

A Case Study: Re-designing Risk Assessment

Questionnaire Design: Warren Cormier, CBO, NARPP

Project Partners: Utah Retirement Systems (URS)

Format: Online questionnaire (5 min)

Testing Time: One Year

Number of Participants: 3,500

Summary: By replacing typical risk assessment questions, which require a working knowledge of financial jargon, personal investing acumen and math, with behaviorally based questions, we’ve created a more personalized and accurate assessment of investing attitudes, including financial courage and preferences. This has resulted in higher levels of trust with the advisor and deeper engagement with financial decision-making.

The questionnaire asks participants to consider how they would react to nine different hypothetical market scenarios. Imbedded in the scenarios are important behavioral concepts (such as prospect theory, hyperbolic discounting, loss aversion, endowment effect, etc.) that impact financial decisions affecting the participant’s retirement income resources, such as a pension, Social Security and defined contribution plans.

The on-line assessment is conducted prior to a retirement planning session with a URS retirement planning advisor. At the beginning of the in-person planning session, participants are told that the assessment (typically completed in advance of the session) indicates the type of investor they are relative to their risk comfort level. Based on their risk profile, the advisor will make recommendations for their pension, Social Security, a model portfolio and/or a target date fund that has been mapped to their specific risk tolerance level.

In nearly all of the 3,500 cases, participants agreed with the assessment of their risk comfort level. And in those very few cases where participants did not feel the assessment was correct, all adjusted their self-assessment by one risk category up or down, but never more.

The fact that a very high percent agree with the assessment is only part of the story. In addition to helping people identify their comfort zone and optimizing their risk/return algorithm, the questionnaire has had a significantly positive impact on the interactions between the advisor and the participant, according to the plan’s administrator.

According to Michael Wilson, “Participants’ level of trust in the advisor has increased significantly as a result of the assessment’s accuracy. This is due to the participant’s feelings that the advisor truly understands the participant, perhaps better than the participant understands him/herself.”

Research on the antecedents of trust and engagement indicate that creating a sense of empathy is critical to building trust and confidence in an advisor’s’ competence, motives and the value of their advice. This consequently makes the participant much more receptive to recommendations.

The perceived accuracy of the assessment also serves to relax the participant, enhancing engagement with the advisor, allowing them to truly focus on the goal of the session and not on the credibility or possible motives behind the advice they are getting. Participants “open up” and are willing to have a discussion that is far less guarded, revealing details to the advisor that are helpful in crafting their recommendations. The perceived accuracy also serves to create a sense of customization of the advice to their particular situation. As we know, nothing engages people more than a story that places them and their needs at the center of the plot.

Does the risk-assessment questionnaire accurately identify the participant’s comfort zone under any circumstances? Our pilot-testing partner believes it accurately describes the participant’s comfort zone in a high percentage of the circumstances they will face as retirement investors. Undoubtedly, the participants agree.