Why Attitude to Risk Questionnaires Are Failing Investors

Most Attitude to Risk (ATR) questionnaires are nothing more than box-ticking exercises. They don’t genuinely assess investor behaviour, and they certainly don’t help clients understand the real risks they face.

The biggest problem? Most investors confuse volatility with risk. They fear short-term market drops but ignore the far greater risks—inflation eroding their wealth, running out of money, or making emotional investment decisions at the worst times.

Yet, many firms still allow clients to complete these questionnaires on their own, with no guidance, context or explanation. This is dangerous. It stands to reason that if an investor has misconceptions about risk, volatility, and long-term investing, they are bound to answer incorrectly—which will ultimately cost them in the long run. It’s crazy to leave uneducated investors to their own devices with something so critical to their financial future. They don’t know what they don’t know, and a flawed questionnaire does nothing to help them make informed decisions. Investors with little experience often:

Overestimate their risk tolerance when markets are calm, then panic and sell when volatility hits.

Underestimate long-term risks like inflation, assuming cash is ‘safe’ when it’s actually losing value.

Choose a profile that doesn’t match their real financial needs, leading to unsuitable portfolios.

If we’re serious about helping clients invest wisely, we need a better approach—one that: Educates clients as they answer (so they leave smarter, not just “risk-rated”). Tests real behaviour, not theoretical preferences (because what people say they’ll do and what they actually do are often very different). Encourages long-term thinking (aligning decisions with real financial goals).

Here is what I think would be a better approach:

1. Setting the Stage – Framing Risk Correctly

Before jumping into questions, the client receives a short, plain-English explainer about the difference between volatility (temporary price fluctuations) and real risk (permanent loss, inflation erosion, bad investor behaviour).

Example Statement: "Investment values naturally rise and fall. Volatility refers to short-term fluctuations, while real risk is the permanent loss of purchasing power over time. Understanding this is key to making sound investment decisions."

2. Behavioural & Emotional Responses to Market Movements

Rather than asking "What’s your risk tolerance?" (which most people can’t answer), we frame questions around real-life scenarios to test emotional reactions.

• Q1: If your portfolio fell 25% during a market downturn but history suggests markets recover over time, what would you most likely do? A) Sell immediately to prevent further losses. B) Wait and see what happens. C) Invest more if possible, as markets are ‘on sale.’

(Explanation: Helps assess knee-jerk reactions and emotional resilience.)

• Q2: Imagine you invest ￡100,000, and two years later it drops to ￡80,000 due to market volatility. What is your primary concern? A) The immediate ￡20,000 loss and whether it will go lower. B) How long it may take to recover. C) Whether my long-term goals are still on track.

(Explanation: Identifies if they view volatility as a ‘loss’ or a temporary event.)

3. Understanding the True Risk – Inflation & Longevity

• Q3: If inflation averages 3% per year, how much will ￡100,000 be worth in 20 years in today’s money? A) Around ￡60,000 B) Around ￡80,000 C) About the same

(Explanation: Educates clients on inflation risk, often overlooked in ATR questionnaires.)

• Q4: Which do you think is riskier over a 30-year period? A) Investing in a diversified global stock portfolio (a collection of thousands of great companies) B) Keeping all your money in cash savings

(Explanation: Tests understanding of real risk—loss of purchasing power vs. market fluctuations.)

4. Investment Time Horizon & Goals

• Q5: When do you expect to start withdrawing from your investments? A) Less than 5 years B) 5-15 years C) More than 15 years

(Explanation: Aligns investment strategy with realistic time horizons.)

• Q6: What matters more to you? A) Avoiding short-term losses at all costs B) Growing wealth over the long term, despite short-term fluctuations

(Explanation: Separates short-term fear from long-term rationality.)

5. Wrapping Up – Education & Clarity

After answering, the client receives a summary of their responses with educational insights, reinforcing key lessons about risk, volatility, inflation, and long-term investing.

Example Summary: "Your answers suggest you are more concerned about short-term market fluctuations than inflation. However, history shows that over decades, equities tend to outperform cash, even with short-term downturns. A well-diversified, long-term investment strategy balances growth and risk."

Conclusion: Why This Works

? Educates clients as they answer – They leave smarter, not just “risk-rated.”

? Tests real behaviour, not theoretical preferences – Avoids abstract, meaningless “risk scores.”

? Identifies misunderstandings early – So advisors can tailor conversations effectively.

? Encourages long-term thinking – Aligning investment behaviour with actual goals.

Would this approach fit your client conversations better than standard ATR questionnaires or am I talking complete bo##ocks????

So, if you were to design a risk questionnaire that actually worked, what would it look like? #FinancialPlanning #InvestorBehaviour #RiskManagement