Perhaps you have met with a financial advisor for the first time and at some point during the conversation the advisor says something like this: “So what is your tolerance for risk?” As you search your mind for an answer, the only thing that keeps coming to the surface is, “Well, I don’t want to lose money.” The advisor looks at him confusedly as if to say, “Well, sure, none of my clients want to lose money.” Instead, it proceeds to ask him if he is a “conservative”, “moderate” or “aggressive” investor. Again, as you search for context, the best option out of the three appears to be “conservative,” so you emphatically state that yes, you are a conservative investor. His reasoning is typically like this because in his mind he equates “conservative” with “not wanting to lose any of your investment.”

At that point, the financial advisor proceeds to check the box marked “conservative” and believes that you have met the requirements of your compliance department. In your mind, you’ve determined your “risk tolerance.” What you don’t know is that you are still potentially miles away in terms of accurately assessing your true tolerance for risk. Why? Because your advisor’s interpretation of “conservative” may be completely different from yours, and unless he / she quantifies conservative, you could end up being convinced of an investment that is anything but conservative in their eyes.

This has long been a dilemma faced by the investment world, as financial advisers and their clients and prospects often fail to get on the same page when it comes to how clients feel about the investment. money. Our industry is full of jargon and acronyms and many times, as the customer or prospect shakes their head to agree, they end up asking, “What just happened?”

So what is the answer? Well, it really is a three step process to truly understand your tolerance for risk.

Step # 1 – What is your relationship to money?

Getting in touch with how you feel about your investable assets is critical to solving whatever problems you’re trying to solve with your money, whether it’s retirement income, leaving a legacy, earning more income now, or saving for a child’s education or grandchild. The answers to these questions will help you get started:

1. Describe your experiences of working with financial advisers in the past.

2. What do you think of the volatility of the stock market?

3. What are your previous experiences investing your money?

4. How much can you afford to lose and still be able to sleep at night?

5. Do you have personal convictions that affect where and how you invest your money?

6. What is the most important factor for you when developing a working relationship with a financial advisor?

Step # 2 – What should you know about the advisor you are working with or considering working with?

1. Do you have a complaint filed against you? (Go to FINRA.org and use the “BrokerCheck” function)

2. Does the advisor work with people like you (feelings about investment, age, socioeconomic similarities)?

3. What is the advisor’s customer service model? In other words, how it will be treated after the sale, that is, communication, reviews.

4. Does the advisor sincerely try to meet you and include you in the decision-making processor? Is he “talking” about you? “

Step # 3 – Does the assessor use an assessment approach to determine their risk tolerance?

A true professional will use a survey type document to come to an agreement on what your real risk tolerance is. Make sure you understand the result and agree.

Here’s an example of a questionnaire-type form that I recommend to the consultants I work with to use with their clients. It is used in conjunction with the Retirement Analyzer software program, which is also an effective financial planning tool. One of the reasons I think this risk tolerance questionnaire is effective is because:

1. It is quite easy to understand.

2. The output is goal oriented.

3. Provides a recommended allocation model along with established risk tolerance. In other words, it doesn’t tell you where to invest.

The third point is especially important because you and your financial advisor will have to agree which investment is aggressive, moderate, conservative, etc. For example, high-yield corporate bonds are aggressive investments, although an aggressive investor may not believe it.

Time horizon

How long, in years, can you grow your retirement assets before you have to start withdrawing?

Points

0-2 years

0 points

3-5 years

1 point

6-10 years

2 points

10+ years

3 points

13+ years

4 points

The answers to this question will help us determine how long you could leave your money invested before having to use it in retirement.

Points____________

Savings and risk approach

What do you think about saving and risk?

Points

I don’t want my principal amount to decrease.

0 points

I cannot afford a significant loss of principal regardless of accrued interest.

1 point

As long as my interest rate stays ahead of inflation, I don’t want the exposure to unsecured equity investments.

2 points

If I can get a moderate interest rate on my investment, I can withstand some market fluctuations.

3 points

I want to invest for higher returns and I am willing to take some risks.

4 points

The answers to this question will help us determine your tolerance for risk.

Points_____________

What would you consider to be a reasonable interest earned on your retirement assets?

Points

3. 4%

0 points

4% -6%

1 point

7% -9%

2 points

9% -11%

3 points

Greater than 11%

4 points

The answers to this question will help us determine your expectations about accrued interest or rate of return.

Points_____________

Risk tolerance

You have just made an investment of $ 100,000. You are exposed to the following best and worst scenarios. What possibility would you choose?

Points

Best case = $ 102,000 Increase = 2,000 Worst case = $ 100,000 Decrease = $ 0

0 points

Best case = $ 104,000 Increase = 4,000 Worst case = $ 96,000 Decrease = $ 4,000

1 point

Best case = $ 108,000 Increase = $ 8,000 Worst case = $ 92,000 Decrease = $ 8,000

2 points

Best case = $ 112,000 Increase = $ 12,000 Worst case = $ 88,000 Decrease = $ 12,000

3 points

Best case = $ 116,000 Increase = $ 16,000 Worst case = $ 84,000 Decrease = $ 16,000

4 points

The answers to this question will help us better determine your tolerance for risk.

Points______________

Total Customer Points: ______________

__________________________________________

0-3 points – Low risk

The biggest concern is the safety of the principal

All funds allocated to guaranteed core products

_________________________________________

4-6 points – Conservative

The biggest concern is the safety of the principal

Large percentage of funds allocated to low risk

_________________________________________

7-9 points – Moderately conservative

The primary objective is preservation, the secondary objective is accumulation

Balanced allocation, slightly overweight towards low risk

___________________________________________

10-12 points – Moderate

The main objective is accumulation

Balanced allocation, slightly overweight towards high risk

____________________________________________

13-14 points: moderately aggressive

The main objective is accumulation

Most of the portfolio is concentrated in high risk

____________________________________________

15-16 points – Aggressive

More aggressive risk level

Potential to generate the highest returns

I hope this article helps you with your own risk tolerance analysis. A competent financial advisor will use a tool similar to this. If you don’t and jump into a product presentation before you fully understand your risk tolerance, my advice is to apologize and find an advisor who takes this part of the financial planning process seriously.

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This tool is provided as an educational tool and is not intended to provide investment advice. All calculations are based on information provided by you and information provided by your financial professional. The analysis tool, charts, and hypothetical illustrations are not intended to be representative of any specific financial vehicle and do not project or guarantee the actual results of any financial product or strategy. Before making any financial decisions, you should obtain tax or legal advice from a qualified professional. Any collateral offered within an insurance or annuity product is backed by the financial strength and claims-paying ability of the issuer.

The risk assessment tool is an informational tool only and is not intended to be an accurate measure of risk. This tool is provided to give you an indication of what your risk tolerance may be.

Any transaction that involves a recommendation on the funds held in a security product can only be made by persons currently affiliated with a duly registered broker / dealer. If your financial professional does not have the proper record, consult your own broker / agent representative for guidance on your securities holdings.