There is a serious problem with the way many advisors approach clients risk tolerance.The traditional practice which has been enshrined in the standard regulatory process for determining the suitability of a recommendation looks at two key factors regarding risk: a clients attitudes about taking risk and financial ability to do so (for example, available assets and time horizon). The advisor then combines the two into a composite score that can be assigned to a portfolio.
Positive attitudes toward risk, plus the financial ability to take it, get a high score and, in turn, an aggressive portfolio. A poor attitude toward risk, coupled with significant portfolio needs, yields a conservative portfolio and a mixture of the two factors usually leads to a moderate-growth portfolio.
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