There’s no arguing that risk tolerance is a complex metric, consisting of everything from the client’s financial goals, to their investment timeline, to the amount they want to invest, and their plain old gut comfort level. But a lack of attention paid to risk tolerance at the beginning of an investment relationship can have long-term repercussions, often resulting in risky portfolio changes that perhaps could have been avoided with better communication.
Unfortunately, talking about risk tolerance with clients isn’t exactly easy.
First-time investors often lack the terminology and self-knowledge to have an accurate discussion of their true appetite for risk. The fact is, the concepts are sometimes nebulous and extremely personal. For example, comfort level is extremely hard to quantify without a concrete and well-defined scale.
While the ability to accurately read a new client is important, even the best interpersonal communicators fail to read relative strangers in their first few meetings. The potential downsides are huge: on the one hand, a client could take a loss that they weren’t financially prepared for. On the other, they could lose out on upside that they didn’t communicate they were ready for.
Instead of simply asking clients to rate their risk tolerance on a 1 to 10 scale, why not use a tool which reflects the full complexity of the client’s needs? Positivly’s free risk-profiling test can help you get on the same page with your clients right from the get-go by grounding the complex nature of each individual’s financial personality by using four essential dimensions: Purpose, Viewpoints, Touch, and Security. This approach breaks their investment tendencies up into intuitive dimensions that make it easy to understand and discuss.
The test helps financial advisors stand out from the pack, getting to know their clients better, and faster. It can also help advisors reevaluate risk tolerance relationships with pre-existing clients, comparing risk capacity and risk preference scores from the test with existing portfolios.
Of the many unique aspects that make up a person’s financial personality, risk tolerance is one of the most important and is sometimes the only thing standing between loss and gain. Positivly’s can help you discover more about your clients, putting them in a better overall position to achieve their goals.