Analyzing Your Client's Financial Profile - Risk Tolerance and Non-Financial Considerations
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.
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):
- Limited partnerships
- Accredited investors
- IV only
- I & II only
- I, II, III & IV
- None of the above
The correct answer is "d" - risk tolerance must be considered for all investors, even institutional ones.