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:
  1. 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

    Pro Tips on Evaluating Clients' Risk Tolerance

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

    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.
  4. 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.
  5. Financial Advisor

    How to Construct an Annual Review for Clients

    One of the greatest value drivers advisors can provide to clients is an annual review of their financial situation. Here are some guidelines for conducting a well-considered review.
  6. Trading

    What Is Your Risk Tolerance?

    Forget the cliches and uncover how much volatility you can really stand.
  7. Financial Advisor

    How to Impress Clients: The First Meeting

    When meeting a prospective client you don’t want your first impression to be your last. Here are some tips to make sure there's a second meeting.
  8. Financial Advisor

    Managing Client Expectations in a Volatile Environment

    Managing client expectations during periods of market volatility is challenging. Here are some ways to go about it.
  9. Financial Advisor

    5 Vital Questions Advisors Should Ask New Clients

    By asking the right questions, listening and building trust, investors and their financial advisors can get the most out of their relationship.
  10. Financial Advisor

    Top 3 Things NOT to Say to Clients

    Steadily growing your client roster can be tough these days. Communicating effectively with customers should be one of your top priorities.
Frequently Asked Questions
  1. Why can you short sell an ETF but not an index fund?

    Because you purchase and redeem mutual fund units from the mutual fund company and (generally) not on the open market, you ...
  2. How do I use Moving Average (MA) to create a forex trading strategy?

    Learn a simple forex trading that uses multiple moving averages and is designed to create low-risk, high-reward trading opportunities.
  3. What is the difference between derivatives and swaps?

    Swaps comprise just one type of the broader asset class called derivatives.
  4. What's the difference between a capital stock and a treasury stock?

    Learn about treasury capital stock, how to calculate a company's capital and treasury stock, and the differences between ...
Trading Center