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 to you, “So,  what is your risk tolerance?” As you search your mind for an answer the one  thing that keeps coming to the surface is, “Well, I don’t want to lose any  money.” The advisor looks at you with some confusion as if to say, “Well, duh,  none of my clients want to lose money.” Instead he proceeds to ask you if you  are a “conservative”, “moderate” or “aggressive” investor.

Again, as you search  for context the best choice of the three seems to be “conservative” so you  emphatically state that yes, you are a conservative investor. Your reasoning is  typically such because in your mind you equate “conservative” with “not wanting  to lose any of your investment.”

At that point the financial advisor proceeds to check the box marked  “conservative” and he believes that he has fulfilled the requirements of his  compliance department. In his mind he has determined your “risk tolerance”. What  you don’t know is that you are still potentially miles apart in terms of  accurately assessing your true risk tolerance. Why? Because your advisor’s  interpretation of “conservative” m may be completely different than yours and  unless he/she quantifies conservative you could end up getting talked into an  investment that in your eyes is anything but conservative.

This has long been a dilemma facing the investment world as financial  advisors and their clients and prospective clients often fail to get on the same  page when it comes to how clients feel about money. Our industry is filled with  jargon and acronyms and many times while the client or prospect is shaking their  head in agreement they end up walking out asking themselves, “what just  happened?

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

1. Step #1 – What is your relationship with money?Getting in touch with how you feel about your investable assets is critical  to solving whatever problem you are trying to solve with your money be it  retirement income, leaving a legacy, getting more income now or saving for a  child’s or grandchild’s education.
2. Step #2 – What should you know about the advisor you are working with  or considering working with?1. Does he/she have any complaints filed against him/her? (Go to FINRA.org  and use the “BrokerCheck” feature)2. Does the advisor work with people like you – feelings about investing,  age, socioeconomic similarities)?3. What is the advisor’s client service model – in other words how will you  be treated after the sale i.e. communication, reviews.4. Does the advisor sincerely try to get to know you and include you in the  decision making processor are you being “talked at”?”
3. Step #3 – Does the advisor use an evaluation approach to determining  your risk tolerance?

A true professional will use a survey type document to gain agreement on what  your actual risk tolerance is. Make sure that you   understand the output and that  you agree.

I use a tool called Retirement Analyzer. It is a terrific retirement income planning tool for Financial Advisors. Unfortunately it is not made for consumer use. Leave me a message and I will be happy to send you an example of the risk tolerance questionnaire.

Question: Do you feel confident with how your risk tolerance was determined? You can leave a comment by clicking here.

                                                   Get Your Guide to Risk Tolerance