Focus on Financial Planning

Keith Costello

Keith Costello is president and CEO of the Canadian Institute of Financial Planners (CIFPs) and the Canadian Institute of Financial Planning (CIFP). Over the past 15 years, Costello has led the creation of educational solutions, practitioner support services and advocacy support for financial planners.

Assessing a client’s risk tolerance goes beyond using a questionnaire or risk-assessment system. An ongoing process is needed

By Keith Costello |

Most financial planners assess a client's risk tolerance as a normal part of their relationships with clients, but the biggest challenge that financial planners face is getting an accurate picture of their client's risk tolerance on an ongoing basis.

Although using a risk-assessment questionnaire or system may give you an initial benchmark on your client's risk attitude, an ongoing process is required to keep you and your client in sync. Thus, effective and meaningful conversations about risk on a continual basis are critical to having a successful relationship with your clients.

Many financial planners consider risk a sensitive topic to discuss with their clients, as the word "risk" itself may make a prospective client anxious and create emotional roadblocks to a productive and rational discussion. Moreover, what the client says or thinks her risk tolerance is may not be true, in reality, during a market correction.

But even though risk may be a difficult subject to broach with your clients, if you do it well, you'll significantly strengthen your client relationships. James Grubman, a wealth psychologist with FamilyWealth Consulting in Turners Falls, Mass., suggests the following best practices when having the risk conversation with your clients:

1. Frame the conversation by using real-world examples and avoid jargon that your clients may not understand, as the concept of risk may be abstract to them. For example, open the conversation by saying, "What helps you sleep well at night when it comes to your money?"

Open-ended questions like this question will elicit emotional responses that will cue you in to how much risk your clients can actually manage. Furthermore, when discussing specific investment risks, avoid terms such as "upside" or "downside risk" that clients may not comprehend.

2. Obtain valid responses for risk tolerance from your clients as well as from yourself. Perceptions and attitudes about risk are subjective and extremely personal, meaning that clients and financial planners may not always be candid in revealing their attitudes. The key is to validate your client's risk profile and know your risk attitude when advising clients. Thus, try the following approaches to get valid risk-tolerance responses:

  • Use dollar figures rather than percentages when discussing losses, such as a $75,000 loss from a $500,000 portfolio vs a seemingly smaller loss of 15%.
  • Use past history to frame market scenario discussions as your clients may not remember market pain accurately. So, for example, you could ask them, "Remember how you felt in 2008 when your portfolio of $750,000 lost $100,000?"
  • Supplement your findings with risk-tolerance questionnaires — but only as a supplement, not as the main instrument for discovering client risk tolerance.
  • Know your attitude toward risk so that you do not frustrate or create mistrust with a client having an opposite view to risk.


3. Fine-tune your communication skills as a means to improve how you talk about — and measure — clients' risk tolerance. You may consider role-playing typical client risk situations with colleagues to fine-tune your delivery. In addition, you should really think about how you respond to your clients' anxiety during periods of market volatility.

That's because communication is essential to addressing clients' concerns during such volatile times. You could talk to them on a weekly or monthly basis to discuss what is going on and suggest possible solutions; provide them with your own commentary on what's happening in the market with links to additional materials; or contact clients if their portfolios drop by more than 10% to discuss and provide perspective.

The key here is to provide empathy, soothe anxiety, and provide numbers in the context of clients' own situations because anxiety is almost never a rational process that can be solved with data.

4. Finally, can a client's risk profile change? Although some clients may temporarily alter their risk attitudes over the short term in reaction to specific market or life-changing events, they rarely change their feelings about risk over the long term dramatically.

Why? Risk is related directly to a client's money personality, which is developed early in life, such as level of security and his or her family experiences. These early experiences shape basic attitudes about saving, spending and investing. You need to understand that short-term changes in attitude toward risk will return back to long-term attitudes. So, when these life-changing events do occur, you need to understand your clients' core money personalities well enough to provide your advice in a way that will not create friction with your client.

Risk questionnaires and systems will give you a starting a point in determining your clients' risk attitudes. However, the only way to ensure you understand your clients' long-term risk tolerance fully is through ongoing conversations about risk and using a detailed process. This will lead to better relationships based on trust and help you provide more effective advice tailored to your clients' risk profiles.