True, and based on those questions my FA graded my risk profile as "Moderately Aggressive." To him, moderately aggressive meant buying-and-holding broad market and intermediate bond funds and a bit of cash-equivalent for decades. But it seems to me the term "moderately aggressive" could just as well have meant I was okay with "structured products." Heck, I had a 30+ year horizon when he started me down the chosen path. So, my thinking is that the portfolio composition an FA comes up with may depend on how the questions are asked, and the FA's interpretation of the results. Sure, there may be some "best practices" in the industry as to how to go about this--there are no doubt software tools FAs use--but I suspect there is a lot of room for interpretation. I suspect that if my quiz results had indicated "Aggressive," my FA would have used those same funds and simply adjusted the allocation percentages. I don't think there was anything I could have said in my quiz that would have led to something like 100% in the S&P--that was off the table for my FA. Yet I have noted there are folks on this forum who did just that. I don't know what would have been right or wrong for me--and it's water under the bridge--but what I have realized is that there can be a lot of variation in defining and identifying risk tolerance and executing a portfolio strategy based on that.
To return to the original post, it would be interesting to have been a fly on the wall when this FA quizzed his clients about their risk tolerance, goals, etc. What did these investors really think about their risk tolerance, and what did they say to the FA? What impression did the FA get about their risk tolerance? And then, did the FA follow best practices in executing on what he in good faith believed to be their risk tolerance? The FA wasn't in the lawsuit.
I recall one question in the quiz my FA gave me all those years ago: "How would you react if your account balance fell by 50% (or 40% or some such big drop)?" I recall replying to the effect that emotionally it would bother me, yet I would take it in stride as I knew I had many years ahead. I would think that is a pretty aggressive outlook, but that's just my interpretation. Apparently, by my FA's methodology, the emotional component downshifted to Moderately Aggressive what might otherwise have been Aggressive. I recall that in the financial crisis of 2008 my portfolio dropped less than the S&P dropped, but emotionally I didn't feel any better about my situation than I would have if it had dropped by more. What kind of psychologist is the average FA? Reams have been written about the psychology of investing.
In this case, it seems the arbitrators believed a "balanced portfolio of stocks and bonds" more closely fit the "mom-and-pop" plaintiffs' risk profile. "Michael Bixby, a Florida lawyer who represented the investors who won the case against Schwab, said the arbitrators gave a 'full award' that reflected how much the investors would have had if their money had been in a balanced portfolio of stocks and bonds, instead of in structured products."
