Series 65

AAA

Analyzing Your Client's Financial Profile - Risk Tolerance and Non-Financial Considerations


Risk Tolerance

A primary consideration in recommending suitable investments is an understanding of the client's risk tolerance. If a particular client is uncomfortable with the inherent risk of a growth portfolio or a specific investment option, it is not suitable - even if it appears to match the client's time horizon and financial goals. Of course, an IA may try to educate the client as to risk/reward tradeoffs and the history of similar investments, but the client is the final arbiter of how much risk he or she is willing to take on.

Non-Financial Considerations
A number of non-objective issues can impact what investments and strategies are appropriate for a particular investor, such as:

  • Investor knowledge and sophistication
  • Client values
  • Client demographics


Exam Tips and Tricks
Consider this sample exam question:

The risk tolerance of the client is NOT a factor to consider when making investment recommendations to which client type(s):

  1. Trusts
  2. Estates
  3. Limited partnerships
  4. Accredited investors
  1. IV only
  2. I & II only
  3. I, II, III & IV
  4. None of the above

The correct answer is "d" - risk tolerance must be considered for all investors, even institutional ones.

Introduction
comments powered by Disqus
Related Articles
  1. 10 Steps For First-Time Home Buyers
    Home & Auto

    10 Steps For First-Time Home Buyers

  2. The Education of Warren Buffett
    Investing Basics

    The Education of Warren Buffett

  3. Credit Cards With Travel Insurance
    Insurance

    Credit Cards With Travel Insurance

  4. In the Thick of Earnings Season - Ahead ...
    Stock Analysis

    In the Thick of Earnings Season - Ahead ...

  5. Outperform The Market Using This Value ...
    Investing

    Outperform The Market Using This Value ...

Trading Center