If you want to provide the best service possible for your investors, testing their risk tolerance is only one part of the solution
Author Gillan Williams
Date 12th August 2016
Whilst is it important to assess the customer’s tolerance for risk, this does not take into account other pertinent factors such as desired return, whether the investment has a deadline (such as a child attending university), or other factors including bereavement or sudden changes in the investment market.
How does this affect the type of product to offer? An investor might be tolerant of a certain level of risk, but if the investment suggested to them does not take into account the timescale, they could invest in something which will have a poor likelihood of achieving preferred returns by the deadline.
A risk tolerance test alone does not provide enough information to make an informed decision. What you do get is a general rating, which offers a certain level of guidance but does not take the whole picture into account. By excluding personal factors and expectations, it will be impossible to offer the most relevant investments.
It is worth keeping in mind that while an investor’s tolerance for risk is fairly static, their preference for risk will change over time. If the markets are performing well, they might be more open to exposing themselves to more risk. Likewise, during a recession, they will most likely be opposed to greater risk. A previous investment may have been for a specific goal, such as a new car. This does not mean that they will have the same preferences for future investments.
You can overcome this and be able to offer the right investments by reviewing their suitability annually. This will give you a more accurate and personal profile of your investor and has the added benefit of improving brand perception.
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