Assessing investor risk tolerance is all about determining the client’s willingness to take investment risk — and their financial capacity to bear it. Most commonly, this is done with a risk tolerance questionnaire that posits a series of questions about time horizon and need for income, and attitudes about risk and market volatility, to calculate a risk score and determine the portfolio that matches it.
The caveat to this approach, however, is that by averaging together risk tolerance and risk capacity scores, the adviser can unwittingly create disconnects between the client’s risk tolerance and the investments he/she is placed in.
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