Financial advisors often don’t gain a complete picture of client risk. By using a fact-based approach to look at risk capacity, advisors can address that problem.
As a financial advisor, assessing your clients’ tolerance to take on portfolio risk is a critical step in creating a suitable asset allocation and financial plan for them.
Traditionally, advisors determine how much risk a client thinks they can handle by posing a handful of questions – either verbally or through a basic questionnaire. These questions typically focus on personal factors such as a client’s investment experience and time horizon as well as a willingness to sacrifice losses for future gains.
This effort to understand a client’s so-called “risk preference” is a useful starting point. Unfortunately, too many advisors stop there and don’t take the additional steps needed to capture the full risk picture. Should markets take an unexpected turn for the worse, this incomplete understanding of risk can potentially lead to angry clients and even legal actions against advisors.