How Are You Assessing Client Risk Tolerance?


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®
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?


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