Measuring the investor’s risk tolerance is one of the first steps in financial planning. There are already tools out there, why do we even bother? Because they all require a leap of faith to arrive at a portfolio decision that we are not willing to accept.
Watch the demo video to find out how we approach it.
A finalist of the Wealth Management 2020 Industry Award, our Multi-dimensional Risk Tolerance is direct, transparent and defensible.
The Risk Tolerance Test is the main driver, and the result is validated by a traditional risk questionnaire. If the results are close, you know you have got it right.
Risk Tolerance Test
As you have seen, our Risk Tolerance Test maps directly to one of your models. The client explicitly agrees to the downside of one of your models, making this approach defensible.
If the result of the Risk Questionnaire (see below) differs significantly from the Risk Tolerance Test, it is likely that the client doesn’t fully understand the Risk Tolerance Test, or they are tempted by the upside while not fully appreciating the downside. In either case, it is worth a deeper conversation to make sure they know what they are getting into.
The Risk Appetite mini-questionnaire is a carefully curated list of questions from the repertoire developed by personal finance professors, Grable, J.E., & Lytton, R.H.
It is used to cross-examine the result from the Risk Tolerance Test, but it can also be used alone if you don’t wish to use the Risk Tolerance Test.