The Riskalyze risk questionnaire is all about understanding when an investor prefers certainty, or when they would rather trade that certainty away to take a particular risk.
If your client receives an unexpectedly high Risk Number ®, one of three factors is usually at play:
- Trivial Amount
It could be that the investment amount that is being assessed is actually a trivial amount of money to that individual. We see this when someone with a $10 million net worth assesses a $10,000 portfolio. Or when someone with a guaranteed pension is assessing a $1,000 IRA.
Because the rest of the questionnaire utilizes the investment amount entered, if the investment amount is too low, it can skew how realistically an investor answers the remaining questions.
- Inaccurate Devastation Amount
If the investment amount IS meaningful to the individual, the culprit is likely the devastation amount being too high — effectively, an amount of loss that is acceptable to the investor (as opposed to devastating).
Keep in mind the technical definition of financial devastation: “the amount where the investor feels they will have to take painful and unexpected action, as it is highly likely their finances will never have a chance to recover.”
- Some like it hot!
Finally, remember that some clients simply have a very high risk tolerance. That doesn’t necessarily mean that they should take that much risk! Talk with your clients about their score, and whether they feel comfortable with it. Focus the discussion on whether or not they are evaluating a meaningful amount of money, and whether they’ve properly defined devastation.
For most of our advisors, that discussion has led to an accurate Risk Number using the questionnaire, but it’s also been a valuable tool for engaging and understanding clients in and of itself.
If a client has used a trivial investment amount or inaccurate devastation amount to answer the questionnaire, we recommend discussing the results with them and either having them retake the questionnaire with more meaningful inputs, or use our Risk Targets tool to find a more appropriate Risk Number to match their true tolerance and goals.