Risk Tolerance: Helping Your Clients Understand Their Portfolio


There’s often a gap between advisors and their clients when it comes to defining risk tolerance. The problem? This is one of the most important aspects of a financial plan to navigate well, as it helps set and align client expectations. Do this well, and clients can retain a higher degree of trust, even during volatility. Miss the mark, and client retention can struggle.

Today, we’re sharing insights from a recent conversation with Erik Ogard, Chief Investment Officer, on how to navigate conversations around risk management confidently.


Using the Right Definition for Risk Tolerance

A common definition of risk tolerance generally focuses on how much volatility a client is willing to endure, but we prefer to focus on the amount of “downside” risk a client is comfortable with. Why is this?

In our experience, when you ask a client about their tolerance for volatility, the answers are fairly subjective. Our industry has long leaned on terms like “aggressive” or “conservative”, but these are dependent on both the client and the advisor and can create a definition gap. It’s far more helpful to identify the amount of money a client is comfortable with risking correlated with the growth targets.

This does two things. The first is that the advisor has a concrete understanding of their client’s comfort zones and tipping points. The second benefit is that the client has articulated their expectations for themselves. Doing so can help to ground them in the midst of volatility. Movement is less concerning when you know your portfolio is designed to bend without breaking.

In our TAMP offering, our advisors have access to Nitrogen (formerly Riskalyze) to help identify and articulate client risk tolerance. There’s no perfect “Bible” for risk tolerance, but their platform does a strong job of leveraging client-first language instead of advisor-first jargon. It provides a shared set of definitions from which advisors can communicate more effectively.


Focusing on Data, Not Just Personalities

Not all risk tolerance is best defined by personality. There are other factors that are less subjective that advisors can discuss to outline a healthy amount of risk for their clients.

One example is your client’s age and retirement horizon. As is common knowledge, the closer they are to retirement, the less ability they have to recover portfolio losses before transitioning to income needs. Even for the more risk-inclined households, this data point helps set clear expectations for the role of downside risk.

Beyond retirement timelines, a comprehensive financial position and needs analysis are essential to identify an appropriate risk tolerance. A client may be nearing retirement, earning a modest income, yet may reap the benefits of a frugal lifestyle. By requiring less to live on, their risk tolerance may be more flexible and provide more margin to cushion them from downside risk.


Risk Tolerance Isn’t One and Done

We once heard someone compare a risk tolerance questionnaire to a Myers-Briggs personality test. It makes sense – if you’ve ever taken one, you know that self-assessments are helpful but not always reliable. Sometimes we “mistype” ourselves. Other times, we may have been right yesterday, but in a year, our perspectives will have changed.

Similarly, for advisors, we encourage anyone who does some sort of risk tolerance assessment with their clients to update that information regularly. This may take the form of periodic re-tests for clients or even manually updating their profiles based on your evolving conversations.

Whatever the method, it’s important to acknowledge that your clients and your understanding of them are evolving. To reach optimal alignment between their risk tolerance and their portfolio, keep an open dialogue going.


Creating Portfolios that Align with Risk Tolerance

Risk tolerance is more than a communication discipline, though it can’t succeed without it. For some clients, the process of constructing and managing appropriate investment strategies is cumbersome. It requires time-intensive resources, which makes it hard to scale as you grow.

At WealthPlan, we have created a premier outsourced investment management solution for our advisors that helps bridge the gap between risk management and investment management for your clients. 

Our use of Nitrogen helps you communicate risk tolerance effectively with your clients, and our platform allows you to translate each client’s preferences to their portfolio easily.

If you’d like to learn more about WealthPlan’s TAMP offering, you can learn more here.

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