Going Beyond Risk Scores

Why risk scores are flawed and outdated


“Good enough” isn’t the standard.

“Great” isn’t even the standard.

“Undeniable” is the standard.

That’s the premise on which Lifeworks was founded.

This article aims to show you the flaws of risk scores, why they should be considered the bare minimum (although often, less than that), and explain how we can do better for investors.

The Old Standard

Risk surveys are the norm when it comes to investment advice.

They vary a bit in content and length, but the end goal is the same: Distill your complex financial and life goals into a single measure of how much risk your portfolio should assume… based on how you felt the day you took the survey.

Inputs usually include age, wealth, income, investment timeframe, and investor behavior. The result of the survey, either qualitative (“conservative” or “aggressive”) or quantitative (“6 out of 10”), is supposed to encapsulate you as an investor well enough that a person or algorithm can assign you to specific investment portfolios accordingly.

Now let’s assume you can build the perfect survey, taking into account recent market performance, choosing a wide enough range of super-specific questions, wording and ordering them properly, and so on.

Would the survey still help you achieve your goals? And should advisors use them?

We don’t think so.

Let’s explore why.

They focus on the wrong thing

Risk surveys focus on how hungry you are for market risk. But the truth is, you don’t care about the markets. You care about achieving your financial goals.

Whether we’re on a bull or bear run doesn’t change the fact that you want consistent retirement income that will support your lifestyle and those around you.

And it’s not your job to understand investment risk any more than it’s your job to cobble your own shoes and hop behind the counter at Chipotle to build your own burrito.

Yet, the way your money is invested today depends how you answer questions about your investment philosophy, like these examples:

Which one of the following statements best describes your feelings about investment risk?

A) An aggressive mix of investments with emphasis on a higher degree of risk that may yield greater returns

B) A balanced mix of investments, some with a low degree of risk and others with a higher degree of risk that may yield greater returns

C) A mix of investments with emphasis on a low degree of risk and a smaller portion of others that have a higher degree of risk that may yield greater returns

D) A conservative mix of investments with a low degree of risk, so I am less likely to lose my original investment”

“On a scale from 1-6, select the level of risk and return you are most comfortable with. 

A) 1 (lowest risk and least return)

B) 2

C) 3

D) 4

E) 5

F) 6 (highest risk and most return)”

“Generally, I prefer investments with little or no fluctuation in value, and I’m willing to accept the lower return associated with these investments.

A) Strongly disagree

B) Disagree

C) Somewhat agree

D) Agree

E) Strongly agree”

“You invest $500,000. What would you prefer:

A) Certain gain of 10% (you’d have $550,000)

B) Take 50/50 risk. Heads, you lose 20% (you’d have $400,000); tails, you gain 150% (you’d have $1,250,000)”

Your retirement plan needs to be based on your goals–not on how your survey says you want to play the market.

They are a snapshot in time

If what you had for breakfast can influence your long-term investment strategy, you need to find a different plan.

Risk scores/surveys are based on how you feel at a single point in time.

It’s an emotional snapshot of how you feel about the market, your retirement goals, inflation, the chances you’re willing to take, etc. on the day you take the survey.

Your answers determine your investment allocation… either until you retire or until you make enough of a fuss that your advisor gives you the survey to take again so they can make small adjustments to your investments.

They blur the value of advisors

Want to take the advisor out of financial advice? Force them to use risk scores as the primary factor in determining your retirement strategy.

We’ve talked in the past about how humans are wholly incapable of beating the stock market regularly (unless they’re super lucky, in which case they usually go on some primetime show making big predictions, only to cash out and be proven comically wrong within a quarter or two) – so why is having a financial advisor overseeing your retirement plan so important?

Because we aren’t trying to beat the market. (Sorry, we sound like a broken record, but that part’s important)

Relative to the stock market, an advisor would likely do about as well as whatever investment bucket your risk score dropped you into. But that risk score doesn’t understand the medical situation your wife is going through, or your grandson who was just born with Down’s Syndrome and will need financial support from you and his parents to handle the obstacles the diagnosis may put in his way, or that dream car you’ve wanted since you were 15 and promised yourself you’d buy in retirement.

Risk scores don’t know you. Your advisor does. And their job is to help you find the old-English definition of “wealth–well-being, or a life well-lived. Ripping that opportunity away from an advisor for the sake of scaling your massive firm a little more feels disgraceful to us. That’s why we don’t use them.

Rather, we replaced them with regular conversations with your advisor about your plans and goals, creating a feedback loop that dynamically manages your retirement plans in a way that matches your dreams – not just how you felt that one time you were in an advisor’s office.