Geoff Davey has been a systems engineer for IBM and a stay-at-home single parent. Along the way, he also built one of the first financial planning practices in Australia. In 1995, he co-founded Sydney-based FinaMetrica, which sells a scientifically tested tool to measure clients' risk tolerance. As a result, Davey has a strong message: Advisors can't accurately gauge a client's attitude toward risk through interviews and ordinary questionnaires.
His career in financial services began in 1971, providing insurance, finance and tax advice to young doctors, dentists and veterinarians. His firm, Davey & Associates, eventually had offices in Sydney, Brisbane and Melbourne. Hiring staff for this growing company introduced Davey to formal psychometric testing.
"We used personality, skills and aptitude testing, so I knew that these 'soft' attributes could be measured," he says. "Initially, we didn't measure clients' risk tolerance. Then we used a questionnaire that one of my partners and I developed. It was the same type common in the industry today."
He sold the planning firm to his partners in 1989 to take on the challenge of single parenthood. "I handled everything okay except cleaning, which I hated and still do. I have had a cleaner ever since."
In the mid-'90s, considering earlier experiences and pondering his next challenge, he thought about finding a better way to measure risk tolerance. "I talked to psychologists and quickly learned that we were looking for a psychometric test."
"It's a very difficult thing to measure someone's risk tolerance in an interview. Planners go badly wrong in one of six cases. They'll be off by as much as two clothing sizes; they'll think clients are a medium when they really are an extra large or an extra small.'"
One reason, researchers find, is that planners tend to be more risk tolerant than their clients. Davey scores a 54 on his test, which measures risk tolerance on a scale of 1-100, with 100 being most risk tolerant. He now travels three months of the year, mainly in the United States, encouraging planners to use his firm's product. Every month, 6,500 more people complete FinaMetrica's profile.