Since many financial advisors tend to think their interview skills and experience are all they need to judge clients' risk tolerance, few are inclined to use formal assessment tools. As we see it, this is a mistake. Judging a client's ability to accept possible losses is very difficult to discern in an interview alone. Planners can meet regulatory guidelines, avoid angry clients and lawsuits, and serve all their clients more effectively by using scientifically tested profiling tools.
Both the SEC and FINRA require that financial advisors obtain an accurate assessment of their clients' risk tolerance, along with information about employment, yearly income, net worth and investment objectives. Of all of these, risk tolerance is the most difficult to judge.
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