As part of the opening of an investment account, usually, you must answer a set of questions finding out how risk-averse you are, called the investment risk profile. Different investment firms have different questionnaires, and this is standard for Mutual Fund based investment firm. The assumption seems to be if you are opening a stock market trading account where you can buy stocks or anything else, you love risk.
The irony of these questionnaires is that if you answer honestly most folks end up in a balanced environment, because rarely will people answer yes to questions like:
- Do you enjoy running in the hallways with knives?
- Does bungee jumping from a hang glider sound cool to you?
- Have you ever held more than 30 lit sparklers at once?
Most of these questionnaires are biased towards pushing investors into the Balanced (and usually higher management fees) funds.
The irony for me is that when I did these questionnaires with TD Mutual Funds, I ended up with a “Balanced risk-averse profile”. This makes sense as I have been burned many times with Nortel and other investments that I have made. The irony is that if I then say, “But I want to invest in the E-series funds“, I am told those are very risky. My opinion is risk has little to do with it, the investment councillor does not make as much selling the E-series funds is the only risk I can see.
Usually I have to argue for a while with the investment councillor, who will eventually say, “OK if you want to buy these funds I will have to change your profile”. Suddenly I love risk, and I am allowed to buy the E-series funds. To celebrate I start using a straight razor to shave myself in the mornings.
Sometimes TD has blocked purchases, in fact, more than once,under the guise of saying, “Your profile says you shouldn’t buy these funds”. The other angle is that you need to redo the questionnaire every few years, in case you become an out of control risk-lover.
What is the Point of These Profiles
Why do these questionnaires exist? I have already stated the bias aspect (i.e. drive customers into higher MER funds), but my guess is that lawyers have mandated them. If I now return to TD and say, “Why did you let me invest in this crap?” they will simply pull out my investing profile and say, “You love Risk, so we let you cut your nose off to spite your face”.
As usual this is another: follow the money, and remember the lawyer’s, situation in financial planning.