How do we calculate your risk profile?

We consider 4 aspects of you

An essential aspect of our methodology is determining the most appropriate profile for each client. At inbestMe, we encourage long-term inversion, and we recommend recurring funding because they are both facts that will help decrease the volatility and the risk. We take the determinations of each account we open very seriously.

To do this, we have developed a complete calculation process that takes into account different aspects:

  • The current client’s financial situation.
  • The specific account’s goal.
  • The risk tolerance of each client.
  • The client’s knowledge and previous experience.

The client has to answer spontaneously to different questions, and once they're combined, they help us to have a complete vision of each opened account. On one hand, sections 1 and 4 are associated with the customer, regardless of the account or accounts that might open. On the other hand, sections 2 and 3 are directly associated with the account. Therefore, a client can open different accounts with different goals. Next, the different sections we take into account to determine the risk profile:

  • The current client’s financial situation 

In this section, we take into account different aspects of the client's current situation, such as: (1) Age and the time he has until his possible retirement. (2) Employment situation (if he is active or unemployed). (3) Savings ratio (annual net income and savings are taken into account to determine the client's risk profile). (4) Ratio between the amount to be invested and the client's financial assets.

(FS 1 + FS2 + FS3 + FS4) * 0,25 = FS

  • The specific account goal

“Behavioural Portfolio Management” recommends adapting the portfolio’s management by subdividing the investor's total patrimony into different goals. This allows the investor to more consistently allocate their risk tolerance (according to those goals).

For example, an investor who already has an “Optimize Savings” account, can use another amount of his investment to grow his patrimony, accepting a greater risk for that second portfolio.

In our evaluation, the final risk profile is also conditioned by the specific purpose of each account. This, weighs up in the final calculation so that the account goal has the appropriate relevance.

It means that an account, created by the same client to complement his retirement, can have a superior risk profile than his primary account to ensure savings for emergencies.

The targets we suggest for inbestMe are:

  • Retirement. Create a saving to complement the public pension  (in case we have one) when the time comes. 
  • I don’t have an exact purpose. For the ones that don’t have a specific goal and just want to make profitable, their savings.
  • Optimize savings. For those who prioritize capital maintenance.
  • Maximize profitability. Intended for that account or investors who prioritize maximizing profitability, assuming more risks.

(TAR1 + TAR2) *0,25 = (AG)

This variable is determined according to the answer given by the customer in that particular contract. The purpose of the account must be related to a temporal horizon and may limit the risk profile.

  • The risk tolerance of each client

In this section, we combine and consider two questions that allow us to establish the real risk tolerance of each user.

On one hand, we do a control question associated with the implied VAR of investment and, on the other hand, which combination of profitability-risk he wants to assume. This answer might limit the profile. 

With this section, we obtain a first potential profile evaluation in relation to the tolerance. 

(T1 + T2 )*0,25 = T

  • The client’s knowledge and previous experience

Finally, during this process the investor knowledge is also taken into account and, even if in the other previous steps the account had a higher profile, this will be limited if the client does not know the risks associated with the assets that would be part of his portfolio, lowering his profile to the recommended one.

EXP1 = Previously client’s knowledge

PROFILE CALCULATION METHOD

A weighting of 25% is assigned to each of the different variables for the client's risk profile calculation:

(*) OC Account’s goal

(*) EXP Previous client’s knowledge and experience

(*) SF Financial situation

(*) T Risk tolerance 

Several conditions modify the risk profile:

  • Age until retirement (67 years old). If there are less than 10 years left to reach age 67, we assume that the time horizon is too short to assume possible market fluctuations.
  • If the time horizon is less than 2 years, the maximum risk profile will be 1.
  • If the purpose of the account is to “optimize savings”, the maximum risk profile will be a 2.
  • If the purpose of the account is "I do not have a specific goal" the maximum risk profile will be a 4.
  • If the maximum assumed loss, according to the VAR, is 3% to 5%, the maximum risk profile will be a 2.
  • If the maximum assumed loss, according to the VAR, is up to 10%, the maximum risk profile will be a 3.
  • If the maximum assumed loss, according to the VAR, is up to 15%, the maximum risk profile will be a 5.
  • If the maximum assumed loss, according to the VAR, is up to 20%, the maximum risk profile will be an 8.
  • To have a profile over 9, the client must have answered that he is “adventurous” when it comes to the combination of return/risk.