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.
Financial AdvisorDetermining a client’s risk tolerance is a critical piece of the puzzle in designing and appropriate asset allocation.
Financial AdvisorWant to keep clients longer? Bolster your risk assessment capabilities.
Financial AdvisorQuantifying the amount of risk that a client is willing to take can be a deceptively difficult task. Here's why.
Financial AdvisorFinancial advisors should avoid generalizing a client’s risk tolerance based on their age or other demographics.
Financial AdvisorYou can't control how they react to the market, but you can help them understand the reality of the situation.
Managing WealthInvestment managers should always act to benefit the client. Learn what actions managers should take on a client's behalf.
Financial AdvisorLosing a client is never pleasant for a financial advisor, but sometimes this is a better outcome than continuing the relationship.
Financial AdvisorOne of the best things that advisors can provide to clients is an annual review of their financial situation. Here are some guidelines.
Financial AdvisorAdvisors can have a tough time selling clients on the bigger picture, especially when the market is volatile. Here's how to manage expectations.
Financial AdvisorAttracting good clients is only half the battle. Here's how financial advisors can keep them for life.