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10 March 2020 Research Reports

Investment Risk Profiling: A Guide for Financial Advisors

  1. Amy Hubble, CFA
  2. John E. Grable
  3. Bob Dannhauser, CFA, FRM, CAIA

This report provides a comprehensive framework that financial advisors can use when developing investment risk profiles for clients. The guidelines can also help advisors incorporate commercial risk assessment tools and meet regulatory requirements.

Assessing a client’s risk tolerance is fundamental to a financial advisor’s ability to add value to his or her relationship with the client. Without risk, there is no reward in modern markets, yet calibrating the appropriate amount of risk for each client is far from a consistent process. This issue is of interest to regulators, who wish to avoid incidents in which clients are recommended investments that are not suitable for them or in their best interests because of the variability of returns and realized losses. Many advisors are generally aware of the signals from investors and their circumstances that guide appropriate portfolio design and often align portfolio risk with an investor’s age. Others use commercial tools to compare risk “scores” attributed to a client and a portfolio, and find that their initial conversation with an investor to reconcile these scores provides an excellent foundation for relationship development. Risk should always be on the minds of both investors and their advisors.

Investment Risk Profiling: A Guide for Financial Advisors presents a comprehensive approach to client risk profiling that accounts for both the financial and behavioral elements of a client’s investment risk profile. It suggests best practices for accounting for all the elements of the three dimensions that should characterize a client risk assessment, while allowing the advisor to also apply appropriate professional judgment. It suggests how commercial risk assessment tools can be evaluated and incorporated into the portfolio development process, guiding advisors to a robust foundation for portfolio strategy and design.

Investment Risk Profiling: A Guide for Financial Advisors Read the full report (PDF)

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