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

Related Articles
  1. Financial Advisor

    Tips for Assessing a Client's Risk Tolerance

    Determining a client’s risk tolerance is a critical piece of the puzzle in designing and appropriate asset allocation.
  2. Financial Advisor

    What Is Your Client's Willingness and Ability to Take Risk?

    Financial advisors must carefully consider a client's willingness and ability to take investment risks, including tax concerns and liquidity needs.
  3. Financial Advisor

    Pro Tips on Evaluating Clients' Risk Tolerance

    Want to keep clients longer? Bolster your risk assessment capabilities.
  4. Financial Advisor

    Risk Tolerance: Why Advisors, Investors Mess It Up

    Quantifying the amount of risk that a client is willing to take can be a deceptively difficult task. Here's why.
  5. Financial Advisor

    Advisors: Revisit Your Client's Risk Assumptions

    Financial advisors should avoid generalizing a client’s risk tolerance based on their age or other demographics.
  6. Financial Advisor

    Manage Your Clients' Expectations

    You can't control how they react to the market, but you can help them understand the reality of the situation.
  7. Managing Wealth

    Asset Manager Ethics: Acting In the Benefit of Clients

    Investment managers should always act to benefit the client. Learn what actions managers should take on a client's behalf.
  8. Financial Advisor

    Losing a Client Is Not Always The End of The World

    Losing a client is never pleasant for a financial advisor, but sometimes this is a better outcome than continuing the relationship.
  9. Financial Advisor

    Advisors Need to Talk Less, Ask and Listen More

    Financial advisors spend a lot of time giving their clients advice on how to invest their money. But what they often forget to do is listen.
  10. Financial Advisor

    How to Construct an Annual Review for Clients

    One of the best things that advisors can provide to clients is an annual review of their financial situation. Here are some guidelines.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center