In a recent article in the WSJ, it was asked, “Can you count on your broker or financial advisor to tell you how much risk is right for you?” The basis for the article was the 2012 requirement by the Financial Industry Regulatory Authority’s requiring advisors to assess how much money clients can accept loosing.
The solution for many advisors is the use of a ‘risk tolerance questionnaire’. This is definitely part of the process in determining how to invest someone’s money, however, as the author goes on to say, “Even financial advisors don’t seem to believe the results of these questionnaires. A recent survey of more that 5,000 advisors by Cerulli Associates, a research firm in Boston, found the advisors believed 26% of clients had an aggressive tolerance for risk and only 14% more conservative where a parallel survey of more than 8,000 clients found that only 8% regarded themselves as aggressive, while 29% considered themselves conservative. There is an obvious different opinion between advisors and clients on what they think risk means.
What tools can you use to determine your client’s tolerance besides your risk tolerance questionnaire? Monthly contact with clients can be a great tool. When you incorporate the 12-4-2 (Once a month meeting with four of those being quarterly reviews and two of those four being in person meetings) you create time with that client that you can use to get to know them on a more personal level. Use those nine touch base calls as a springboard to ask your clients those deeper questions about themselves. Let them voice their worry about the future if something goes wrong and use those concerns to design and implement a plan that more accurately reflects their needs. Your client’s will sleep better at night and so will you.