All advisors are expected to assess clients' risk tolerance before designing their portfolios. We diligently conduct this assessment, yet we are shocked, simply shocked, when our clients' behavior doesn't match their self-reported risk tolerance. How do we know when this happens? We get a call from a client, panic in his or her voice, insisting that we modify a portfolio in reaction to market fluctuations.
Why are we still getting those calls, and worse yet, why are we still surprised by them? We can blame the traditional risk assessment tool that most advisors use. Yes, it's been validated by research, has been shown to measure risk tolerance reliably, is used by many of your peers and comes with some impressive statistics, charts and graphs. We use that risk tolerance score, along with a consideration of the client's assets, desired rate of return, income needs and age to place the client into an investment objective category, such as aggressive growth, growth and income, balanced, income or some other iteration.
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