It all starts with the Risk Number®. The Risk Number is a quantitative way to pinpoint how much risk an investor wants, how much risk they currently have in their portfolio, and how much risk they need to reach their goals.
In this article, we'll cover the approaches to find out how much risk our client or prospect wants through the use of the Risk Questionnaire or a Risk Target.
Set A Risk Target
We developed Risk Targets for clients you already know quite well or for advisors that prefer to start their process with goals, portfolio analysis or financial planning. Simply select the Risk Target that is most aligned with the account or portfolio objective. When you set a Risk Target, you’ll see a set of preset ranges, or you can click Set Manually and pick the exact Risk Number you prefer.
Use A Risk Questionnaire
Our Risk Questionnaires take academic work in behavior finance (Prospect Theory) and a series of risk/reward questions, using amounts specific to the investor, in order to calculate a quantification of risk preference, expressed as a Risk Number between 1-99.
Nitrogen offers three distinct risk questionnaire approaches. Each begins by collecting some basic customer information, then proceeds to assess an investor’s risk preference.
1. Next-Gen Risk Questionnaire
The Next-Gen Risk Questionnaire is the result of thousands of hours of research, marrying mathematical sophistication with an elegant user experience that helps investors truly understand the contextual relationships between investment risk and reward - allowing you to showcase the rigor of your process without sacrificing usability.
The Next-Gen Risk Assessment coaches and educates the investor, introducing them to core Nitrogen concepts like the 95% Historical Range™ from the very first step. They’ll begin by focusing on the next six months, and selecting an initial risk and reward “comfort zone”.
Nitrogen immediately puts this selection to the test by presenting them with a large-loss scenario within the bounds of that initial comfort zone. From there, an investor will be presented with a series of risk/reward scenarios, choosing between investing within their comfort zone or accepting a certain outcome.
After being presented with our calculated result, investors have the option to adjust their final Risk Number up or down, before finally confirming their final Risk Number.
Note: To access the Legacy Simple or Detailed Questionnaire click the "Use A Legacy Questionnaire" option at the beginning of the questionnaire process. (see image below)
Have questions? Check out our Best Practices article for how to best take advantage of the Nitrogen questionnaires in your practice.