How can a Risk tolerance test help an investor to get comfortable with taking financial risk?

0
83

Can a Risk tolerance test emotionally help in making an investor comfortable with taking financial risk.?

Did you know that people have an instinct for avoiding risk while investing!

Can there be some evaluating test to ensure a person’s actual risk-taking ability?

Can the financial planner check the ability of his investor for taking on the market risks? Can this test results be incorporated into the client’s financial plan? Can it be some internationally accepted and used over the continents?

Risk tolerance is how emotionally comfortable a person is with taking a financial risk. For example, how much a person is willing for their portfolio to diminish for a chance to make more significant returns. It is psychological and is best measured with a psychometric tool.

By knowing how comfortable a client is with investment ups and downs, advisors like us can make sure our clients don’t panic, or worse, blame us the advisor when a risk is realized.

A good risk tolerance profiling test can pinpoint an investor’s natural tolerance for risk. This helps both the financial planner and the client in developing the financial plan. The test helps to know how much is the investor willing to let his or her portfolio dip,  for that chance at some above-average returns. This further helps in understanding that one doesn’t make rash decisions. 

Decisions like buying when one should be selling or buying when one should be selling. Thus, not trying to use personal bias on the market ups and downs leads to a tremendous balanced investment process. 

Risk tolerance is how emotionally comfortable a person is with taking a financial risk. For example, how much a person is willing for their portfolio to diminish for a chance to make more significant returns. It is psychological and is best measured with a psychometric tool.

By knowing how comfortable a client is with investment ups and downs, advisors can make sure their clients don’t panic, or worse, blame the advisor when a risk is realized.

Risk profiling is a process for finding the optimal level of investment risk for your client by balancing their risk required, risk capacity and their risk tolerance.

There is often a mismatch between risk required, capacity and tolerance. Risk profiling test helps you to identify mismatches and resolve them with your client.

Risk profiling is a process for finding the optimal level of investment risk for your client by balancing their risk required, risk capacity and their risk tolerance. The three components are :

1.         Risk Tolerance is the level of financial risk the client is emotionally comfortable

2.         Risk Required is the risk associated with the return required to achieve the client’s goals from the financial resources available

3.         Risk Capacity is the level of financial risk the client can afford to take.

This can be done even for couples. This ensures that the financial planner can reconcile any differences between them before there is ever a problem.

This leads to less stress and panic,  leading to better long term advice opportunities for the planner.

You can expect the following from a good risk profiling test:

1.         This is a highly personalized report. It is customized to each person.

2.         This test helps to gain a great understanding of your financial self and financial risk

3.         It helps to understand better one’s risk tolerance which related to alternative portfolio outcomes.

4.         As a financial planner, I come to know your needs faster and more accurately, thus resulting in better advice.

5.         We know that both you and self-value the outcome of a planning process, where you make a properly informed decision as to the financial risk in your plan.

A good risk profiling test is made up of the following parts:

1.         A psychometric questionnaire of personal financial risk tolerance (risk tolerance profile), 

2.         a method for taking the results of the questionnaire into account in the financial planning process, and 

3.         educational materials designed to personalize the explanation of investment risk and return to help investors better understand how their investments might perform in the future. 

4.         Psychometrics is the blending of psychology and statistics. It is the scientific discipline for testing personal characteristics such as risk tolerance. Psychometrics sets international standards for both the development of tests and for evaluating the qualities of tests. A good risk tolerance profile exceeds these standards for validity and reliability. 

We invite our clients to complete the risk tolerance profile, and compare their risk tolerance with their investment strategy.

To have a great relationship, we, at Advantage Financial Planners LLP (Registered with SEBI as Registered Investment Advisor), need clarity, and that’s where an acceptable risk profiling test helps to communicate the complex area of risk tolerance.

I am delighted with the experience our clients go through in understanding their attitude toward risk and return.

Without a specialist understanding of the psychology of investing, it is difficult for an individual adviser to assess a client’s risk profile objectively. A sound risk profiling system is a valuable tool that fills this void, giving advisers an independent scientific assessment of a client’s propensity for risk.

The strength of the system is in helping with the advice process. There is no doubt in my mind that it allows us to help clients understand how to bridge the gap between their level of comfort and the level of risk required for them to meet their objectives – whether that is by modifying their goals or by accepting a different level of risk.

To Submit, Look at the best way to measure risk tolerance by using a simple, psychometrically designed risk tolerance questionnaire. For all our clients, this is mandatory. We do not charge our clients for this special paid service.

Take action now! Contact your financial planner to get your risk profiling test started before you start investing.

Happy investing with your risk appetite!

Previous articleHow Does it Pay to Engage a Financial Advisor
About ADVANTAGE FINANCIAL PLANNERS LLP: The Firm is registered with Government Of India-The Ministry of Company Affairs as a partnership firm. The firm is registered with SEBI (The Securities and Exchange Board of India) as "Registered Investment Advisors (RIA) under the SEBI (Investment Advisers) Regulations, 2013. Registration with SEBI as "Registered Investment Advisors (RIA) brings more formal approach, risk profiling, disclosure, and transparency. While the firm is a fee-based investment advisor, this brings you the opportunity to get unbiased, researched, accurate, transparent and professional advice. The firm is managed by the founder and its Partner, Taresh Bhatia. The company provides financial planning advisory services from its office in Gurgaon, India. The firm specializes in investment planning, retirement planning, tax planning, personal financial planning and wealth management. About Taresh: Taresh Bhatia is CFPCM CERTIFIED FINANCIAL PLANNERCM. He provides fee-only financial planning advice. He has helped over 300 families plan and organizes their economic life so as to move positively towards their financial goals. Taresh is an expert on financial advice and has three decades of industry experience. Among his qualifications, he is a CFPCM CERTIFIED FINANCIAL PLANNERCM and an MBA from IMI, New Delhi. He is also a member of the Financial Planners' Guild, India (FPGI), an association of Practicing Certified Financial Planners. If you have any questions, please email us at [email protected]