Risk Tolerance

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Feb 26, 2007 6:12 pm

What method do you folks use to determine a person's risk tolerance?


(I'm not satisfied at all using EDJ's Risk Tolerance Questionnaire.)


Feb 26, 2007 8:26 pm

Factor age, investable assets, HH Net Worth, income, required income in retirement, inflation, current income, and time to retirement and figure it out for yourself.  You're the financial advisor, right?


My

Feb 26, 2007 8:27 pm

Sorry, it cut off...


My point is that if you can't tell the investment objectives of an 80 year old millionaire vs. a 30 year old with a $10,000 Roth, then you have bigger things to worry about than risk tolerance.

Feb 26, 2007 8:41 pm

Entrylevel, there is the matter of documenting risk tolerance. Things can come back to bite you in a down market, so having the surveys and such in the file can save your bottom. Having the client formally answer some questions that illustrate fluctuation, like, how would you feel if your portfolio was "down" 20% ($40,000) - making lots of notes. Better use a formal survey for that, not something you made up yourself.

Feb 26, 2007 9:28 pm

Goldman Sachs has a decent questionaire on their website (I'm pretty sure it's Jones approved).  After the client has filled it out, you'll know what type of risk they want.


entrylevel, don't be too quick to ASSUME someone's risk tolerance just from their situation.  That is something that can only be found by asking them.  Assuming the 25 year old tech guy with a $50,000 rollover wants to be aggressive is a quick way to lose a prospect.


You know what happens when you assume...

Feb 27, 2007 10:36 am

I don't really care for the risk tolerance questionairre Jones has either, but I have people fill it out anyway.  It's 6 questions, basically asking the same thing 6 different ways.  However, it does get people talking to you and to each other when you actually put it in front of them.  Some people think they want to be aggressive, but when you put the paper in front of them and show them an aggressive port could go down by 30-40% in any given year, they pause.  They want to make the return of an aggressive portfolio, without the losses.  Typical client conundrum. 

Feb 27, 2007 12:21 pm
Borker Boy:

What method do you folks use to determine a person's risk tolerance?


(I'm not satisfied at all using EDJ's Risk Tolerance Questionnaire.)





I assume all clients are conservative, unless they are very or extremely conservative.




Feb 27, 2007 7:45 pm
AllREIT:

I assume all clients are conservative, unless they are very or extremely conservative.


Precisely put! In fact, I would never take on a client who told me that they were willing to take (for example) a 50+% hit on their portfolio, even if it was in writing. Why? They can still take me to arbitration and there's always the chance that they could win. Not worth the hassle and believe me, you should always consider the potential "hassle-factor" with every new client.

Feb 27, 2007 9:18 pm
doberman:
AllREIT:

I assume all clients are conservative, unless they are very or extremely

conservative.



Precisely put! In fact, I would never take on a client who told me that

they were willing to take (for example) a 50+% hit on their portfolio, even

if it was in writing. Why? They can still take me to arbitration and there's

always the chance that they could win. Not worth the hassle and believe

me, you should always consider the potential "hassle-factor" with

every new client.





I agree with you guys. Brokers don't need "aggressive" investors unless

you're a stock-jockey. I too assume everyone is conservative unless we

determine through conversation that they are "really" conservative. My

goal is to not lose client's money.

Feb 27, 2007 9:31 pm

Sorry to offend...here is a very simple way to cover in one question.


Which of the following risk/return combinations are you comfortable with your annual performance:


Portfolio A: +40% gain/-30% loss
Portfolio B: +25% gain/-15% loss
Portfolio C: +15% gain/-7% loss
Portfolio D: +10% gain/-4% loss
Portfolio E: +4.5% gain/0% loss


Take into consideration their time frame to using the assets, then take them one step safer.  For instance, if a 50 year old retiring in 12 years with plenty of cushion says portfolio C, then move him closer to Portfolio D. 


One note, I ALWAYS have the client fill out my firm's risk tolerence profile, I was simply stating take them with a grain of salt.  Clients tend to answer so they have the gains from Portfolio A and the possible losses of Portfolio E.  That's why it is your job to keep them safe.  FYI, not one client called today.

Feb 28, 2007 6:57 am

It's simple....all clients are ultra-conservative AFTER a 10% pullback in the

market, and they're highly aggressive AFTER a 40% runup.

Feb 28, 2007 7:45 pm


So true, Philo.


Perhaps to add to your statement: 20% pullback - yell at broker, 30% pullback - see an attorney, 50+% pullback - pursue arbitration.


50% run-up - they sleep well at night, 100% run-up - they brag to their friends, 150% run-up - invite broker over for dinner, 200% run-up - mortgage house to invest more.