How Are You Assessing Client Risk Tolerance?

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In January, the Financial Services Authority, the regulatory authority for the financial services industry in the United Kingdom, released guidance on assessing suitability or risk tolerance for a client. The document is fairly lengthy and good reading—and, it begs the question: Will the United States follow?

I do not know, but I am sure the U.S. is looking at the U.K. model. Irrespective, I feel every adviser should have some internal consistent methodology to access risk. Creating a questionnaire and scoring model I feel is the best way to do that. Additionally, a summary of your findings should be displayed in the Investment Policy Statement.

For those who do not want to build their own questionnaires and scoring models, there are many third-party solutions. One such solution is FinaMetrica. They perform a fairly detailed process to determine a client’s risk tolerance. They do not recommend any type of allocation; that is the responsibility of the adviser.

Others tools I have seen that perform similar functions include ones from Morningstar and Envestnet. Of course, you can build one yourself in Excel.

In all cases, you should have a standard process and review the risk tolerance at least annually. (For a copy of the FSA document, please e-mail me.)

Ash Bhatnagar, CFP®
President
RIA Independence Co.
Princeton, N.J.

 

 

Editor’s Note: What risk assessment tool or process do you use? Share your experience with your colleagues through the comments function of this blog.

2 thoughts on “How Are You Assessing Client Risk Tolerance?

  1. Where do we send an email for a copy of the FSA document?

    Like

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