We all know that investing, just like almost any other part of life, involves risk. Knowing what your clients’ risk tolerance is, however, is the key to a truly successful and fulfilling business. As advisors, we can easily fall into the trap of assigning risk tolerance to our clients based on pre-conceived beliefs and our own idea of what their tolerance should be. This can be a huge mistake. If you don’t fully understand your clients’ risk tolerance and communicate about it appropriately, you could find yourself dealing with a number of defensive clients and your job will be that much more difficult (and less fulfilling).
So how do you identify your clients’ risk tolerance? The best way is to take a helping approach. Work with them to answer questions and pinpoint how they feel about their current situation and future. That way, when you arrive at an answer, they will feel more like they were part of the process and will be more likely to work with and communicate with you based on their level of tolerance. Here’s what to take into consideration so you can best serve them.
What to Take into Consideration
Age Though it should certainly not be the determining factor in identifying risk tolerance, age-based tolerance is definitely part of the big picture. A couple in their 20s is obviously going to feel different about risk than one in their 50s simply because they know they have longer to take advantage of the market. They can withstand a volatile market and get into more aggressive strategies because their portfolio will have plenty of time to recover should they lose money. Help walk your clients through how many working years they have left before their ideal retirement age, how many market corrections they can expect during that time, and what it means for their investment strategy.
Net Worth and Current Financial Situation A client with a few million dollars in the bank is going to react differently to the prospect of risk than one who is scraping to put away a few hundred dollars a month for retirement. Sit down with your client and address the big picture of their financial situation—not just their investments. Make sure you know what they plan to do with the money they’ve saved, how much more they’d like to save, and how this plays into their overall retirement situation.
Retirement Goals Don’t just assume your clients are shooting for $1 million in the bank so they can buy a condo in Florida the instant they turn 65. Each of your clients’ retirement goals will be different, and this will affect their risk tolerance. Make sure you go over when they want to retire, how they want that retirement to look, and how much money they’ll need saved to make those goals a reality. Only then will you be able to see how they view risk as it relates to their overall goals.
Personality To successfully mentor your clients, you need to know as much about them as possible. This includes their personality (are they risk-takers? Conservative? Do they focus on facts and numbers or rely on emotion?), their investing behavior, and how they tend to react when things change in the market. This will help you not only identify their risk tolerance, but also help you develop better communication strategies and a deeper relationship with them.
As an advice-based financial advisor, you need to understand your clients’ tolerance for risk so you can suggest the right products and strategies that will not only make them feel comfortable and secure, but will also help them achieve their ideal retirements. This is a big part of being a fiduciary and will help you build that seven-figure entrepreneurial business. If you have any questions about risk tolerance or helping your clients identify their ideal retirement scenarios, please reach out so we can chat!