Series 65

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.




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