Assessing Risk Tolerance

Financial planners have a professional, ethical, and legal obligation to assess their clients' risk tolerance. Many advisers should be aware that industry-standard risk questionnaires are not a panacea to determine risk tolerance. Usually comprised of 5 to 20 questions, industry-standard questi...

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Veröffentlicht in:CPA Practice Management Forum 2012-09, Vol.8 (9), p.5
1. Verfasser: Davey, Geoff
Format: Artikel
Sprache:eng
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Zusammenfassung:Financial planners have a professional, ethical, and legal obligation to assess their clients' risk tolerance. Many advisers should be aware that industry-standard risk questionnaires are not a panacea to determine risk tolerance. Usually comprised of 5 to 20 questions, industry-standard questionnaires are neither valid nor reliable. They are arbitrarily constructed without any scientific discipline, containing too many bad questions that are irrelevant or too technical and not enough good questions that are essential for acceptable reliability. Having questions with high usability means the planner does not need to be involved in explaining the questions. In psychometric terms, a "valid test" measures what it claims to measure, and a "reliable test" measures consistently with known accuracy. Advisers' estimates of client risk tolerance are alarmingly inaccurate, with estimates typically correlating to test results at only -.4.
ISSN:1556-0899