Unique formula for risk tolerance
What risk is your client willing to take? It can be a difficult task for you and your client to estimate this properly, because not all risks are visualized as easily. The integration of AMCET's EPI engine and FinaMetrica's psychometric risk tolerance test creates a unique risk profile.
No more complicated questionnaires with vague concepts
In practice, incorrectly formulated questions and scenario analyzes are often used to determine risk tolerance. These scenario analyzes are difficult to understand, creating the risk that clients will guess answers. A consequence of guessing is that people do not think about what the question actually means regarding financial risk to their assets. This can make the client's risk tolerance appear (much) higher than it is.
By integrating the “EPI engine”, which provides an overview of the development of the assets per stock market climate and per investment strategy, the (negative) risk is visually presented to the client. The client sees at a glance what risk he / she can take with his assets.
In addition to the EPI engine, the FinaMetrica psychometric risk tolerance test is also integrated into the software. The risk that the client can live with is determined on the basis of twelve questions. In other words: which risk is the client willing to take.
Based on the psychometric risk tolerance test and the Monte Carlo simulations of the EPI engine, the software provides an advice about the most suitable risk profile. The choice of the actual risk profile always remains that of the client in consultation with the asset manager / adviser.
An example of a Monte Carlo Simulation in the SCOPE KYC Cloud Portal
The EPI Engine
The EPI Engine makes the risk capacity and the required risk transparent for the client.
The EPI engine performs a Monte Carlo simulation where the returns of the investments can be calculated for different stock market scenarios. Clear visualisations show the client whether the capital target can be achieved and what the most positive and negative scenario is per stock market climate.
The Monte Carlos simulations are created based on parameters entered by the asset manager himself. The EPI engine can calculate "what" the value of a parameter should be in order to achieve an objective with a certain degree of certainty. This makes it possible to answer complex questions from the client., such as the examples next.
How long and how much should I invest to reach my objectives, if I choose to invest in stead of saving?
How does the feasibility of my objective change if I put €100 every month in an investment account instead of a savings account?
If I opt for offensive investing (with a lot of risk), what will happen to my assets in the worst case scenario? And at best? How does this differ from savings or defensive investing?
How much do I have to put in extra per month to increase the feasibility of my goal to 80%?
The psychometric risk tolerance test
Besides the objective risk appetite that is primarily based on numbers en the ability to bear losses, there is a subjective risk appetite. How does a client deal with the loss of value in a downward stock market?
The FinaMetrica psychometric risk tolerance test shows the subjective risk tolerance per client. For this, a questionnaire of twelve questions is completed. FinaMetrica's risk tolerance test meets or exceeds international standards for assessments of its kind with a confidence level of 0.9 to 1.
The importance of a psychological risk tolerance test is that actually losing (a lot of) capital has a psychological impact on the client. As soon as the client is aware of the risk that he is willing to take with his assets, he can make a more conscious choice with which investment strategy he / she will invest.
The combination of both objective and subjective risk assessment creates a best practice risk profile. Based on this risk profile you and your client can determine which investment strategy suits your client the most.