Don’t Take On Risk To Impress

Trying to measure how comfortable a client is with the concept of investment risk is challenging for every Financial Planner.  There’s a plethora of tools out there to get this crucial metric right, but really it comes down to this: How accurately (honestly?) clients answer risk profiles.

It can be stressful for the client: Even though there are no right/wrong answers in the assessment, they can feel like they ‘should’ be more aggressive than they really are.

Will my Financial Planner think I’m not as astute as I should be if I am not comfortable with more risk? Will my Financial Planner think I am naive if I think this or that?

And guess who loses when this happens?

Everyone.  The client.  The Financial Planner.

Because when assets start to perform in a way we don’t like (this happens to every asset class, by the way), and we didn’t expect that or anticipate it, disappointment takes place.

And if you are working with a Financial Planner that makes you feel like you aren’t aggressive enough with your risk, or that you should know more about ‘sophisticated’ asset classes, you are working with the wrong Financial Planner.

It’s a Financial Planner’s job to make sure you, as the client, are comfortable asking any question about any asset class, any risk capacity, any concept around financial planning.

It’s your Financial Planner’s role to put you at ease and to, working with you, provide a plan that you are confident in and feel empowered by…not intimidated by.

While I do my best to make sure my clients understand I am on their side, and their advocate, I may at times overlook the reluctance they have with an investment concept.

It is then my responsibility to step back and check in regularly through the process to ensure their questions are getting addressed and to ensure they are comfortable with the process.

I make sure to ask various risk tolerance and risk capacity questions from various angles. This ensures 2 things: 1) They understand the concept within the question and 2) They are comfortable answering it accurately.

I have at times started a client out more conservatively than what broad advice would recommend, but that is to ensure they are comfortable with the concept of investing and getting comfortable with various asset classes’ volatility.

Case in Point: A client in their 20s is oftentimes pressured to be all in stocks because ‘they have time on their side’.  But perhaps what needs to take place first is a better understanding of how markets work and how various asset classes respond to various economic realities.  And then, once they better understand volatility and asset classes, are they then more comfortable in a more aggressive asset mix.

Then, once they are more comfortable with it, and if they are more comfortable taking on more risk that would allow them to meet their goals more effectively, would a more aggressive asset mix  take place.

Don’t let peer pressure or general investment recommendations influence you to take on more risk than you are comfortable with.  At the end of the day, it is your money, your investments, your financial future, and your financial plan.

Make sure you are working with a Financial Planner that respects that.