It's Not Your Client's Risk-Tolerance that's Changing....

This post is in response to: The Intertemporal Persistence of Risk Tolerance Scores

This study attempts to make the case that risk tolerance sees marginal change over time (at least in the 5-year limited period of the study).  

However, there are several comments that illustrate just how important it is that an advisor remain acutely aware of the emotional receptivity of their clients. In fact, it affects the formulation of their investment policy to align with the client risk tolerance profile and the communication and presentation strategies that are created for each client. On this front, the MPI profile can go a long way toward isolating those clients who would be more susceptible to reactions and therefore would need more active support.

As an example, over the years I have had engineers, doctors, and senior executives as clients. Based on their very different perceptive styles, the packages I prepare for these three groups of investors is substantially different. Furthermore, I aim to align more distinctly with how they receive and process information as well as the frequency with which I touch base with them.

To get a better understanding of how this pertains to the findings of this study, take a look at the matrix below for my responses to specific sections.

Study Comment
(From Practical Application Section)
MPI Value Proposition
“Second, and perhaps more importantly, findings highlight the importance financial planners play in adding value to their clients’ lives. Sometimes clients engage in problematic behavior or make changes in their financial plans that appear to run counter to their risk tolerance. When this happens, it may be only tangentially related to a reduction in a client’s tolerance for risk.” Clients sometimes take actions based on their personalities that may or may not be aligned with their risk tolerance scores.  It’s incredibly important to have a more in-depth perspective of what a client’s major personality traits tend to produce in terms of actual behaviors. By correlating their behaviors with their decisions and reactions to recommendations over time, advisors can have a more realistic set of expectations to identify which clients may be more susceptible to engage in “problematic behavior”.
“…financial planners can add value to the client-planner relationship by helping clients remain goal-focused and by aligning advice with a client’s risk tolerance.” Going beyond risk tolerance assessments to identify a client’s unique communication styles will help align the advisor’s recommendations with the client’s specific goals and their sensitivities toward achieving those goals.
“It may be possible, for example, that events such as divorce, job loss, or personal or business bankruptcy shift a person’s willingness to take financial risks.” It’s obvious that life events can have a different impact depending on an individual’s personality. However, identifying emotionally vulnerable clients that could react poorly to life events can help advisors provide an appropriate level of communication. By taking this approach, advisors are more equipped to provide additional support and reassurance to their clients during difficult times.

While we acknowledge the study’s findings regarding risk tolerance variance, it’s important to understand that client emotions and attitudes aren’t constant. Understanding the role that emotions play during a client’s risk assessment and the degree to which they may change under different market environments is crucial to a successful advisor-client relationship. It is just as, if not more, important to have a pulse on the client’s “heart for risk”, which tends to take the wheel during times of crises. MarketPsych Insights can help push an advisor past risk tolerance scores and aide clients through the difficult times with personalized interactions, which keeps them happy and you compliant with the know your client guidelines.