Perception of Financial Risk: A Survey Study of Advisors and Planners

Abstract

Financial advisors are continually faced with the challenge of evaluating the quality of financial investments. Previous research has indicated that even among researchers of financial markets, diverse views exist about the meaning of risk and its relationship to returns. A survey study of 265 financial advisors and planners was undertaken to develop a deeper understanding of how financial judgment is related to other characteristics of asset classes, particularly perceptions of their risks, returns and return/risk relationships. Risk-related dimensions included volatility, investment time horizon, performance predictability, knowledge level and overall perceived risk. Return-related dimensions included overall perceived return, return/risk ratio and one & ten year rate of return. The results indicated a strong correlation between perceived risk and return, consistent with finance theory. However, a more complex, curvilinear picture emerged with respect to the relationship between perceived risk and perceived return/risk. The findings suggest that among financial advisors, risk can take on a variety of meanings when the concept is applied to evaluating different asset classes.