LO 2.1.3: Access a client’s risk tolerance, risk perception, risk capacity, attitudes, and beliefs to formulate recommendations

Question 1

Risk Assessment

Answer 1

Measurement of clients’ psychological ability to deal with uncertain outcome

• helps manage the volatility and risk of investing
• best done by collecting qualitative and quantitative data

Question 2

When does Risk Assessment take place

Answer 2

Completed during the data gathering step of the financial planning process.

Question 3

Components of Risk

Answer 3

Risk tolerance, Risk Perception, Risk Capacity

Question 4

Risk tolerance

Answer 4

Tradeoff that clients are willing to make between potential risks and rewards.

Question 5

Risk perception

Answer 5

Assessment of the magnitude of risks being traded off

* How to invest $5K investment vs $500 investment, different take on how much risk they can afford

Question 6

Risk capacity

Answer 6

Degree to which the client’s financial resources can cushion risks
* How much risk can a client take on if they have a massive amt of net worth; e.g. can they afford to lose $100K, vs. not afford, not enough wealth to cushion the downs

Question 7

How are attitudes, beliefs, and values connected

Answer 7

they all affect each other-

• attitudes are affected by beliefs and values,
• beliefs are affected by attitudes and values, and
• values are affected by attitudes and beliefs

Question 8

Attitudes

Answer 8

Reflect opinions, values, and wants
* e.g. ESG investing; incorporating values, affects attitudes toward risk and belief how much risk they can tolerate, etc.

Question 9

Beliefs

Answer 9

Are a type of attitude because they reveal the understanding of some aspect of one’s life

Question 10

Values

Answer 10

Attitudes and beliefs for which one feels strongly

* Represent what a person believes to be right

Question 11

Context

Answer 11

Greatly influences a client’s perspective

• Includes past history or any conditions that presently exist.
• Example: when markets headed up, gives context; when markets headed down, also gives context. Affects their risk tolerance and answers to risk assessment questionnaire.

Question 12

Psychological profiles

Answer 12

Helps predict the way a client will perceive and judge any recommendations
* Understanding the unique profile of a client

Question 13

Perception

Answer 13

How people are aware of things, people, events, or ideas

* Perception is their reality

Question 14

Judgment

Answer 14

Decisions they make, or conclusions they draw from their perceptions

• Making conclusions about what has been perceived
• Can help them overcome biases they come to the table with, but unless they change their perceptions, they are not going to change their judgments/decisions.

Question 15

How can you best assess a client’s risk tolerance, risk perception, risk capacity, attitudes, and beliefs

Answer 15

doing a little bit of psychology as we walk them through this

• helping them see things from a rational, unbiased and emotional (as much as possible) frame of reference
• get a true measure of their ability to tolerate the volatility of the market