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Thoroughly Assess Risk Tolerance Against Client Goals

April 27, 2018

This time we hear from D. Norman Quynn, a financial advisor at Capital One Investing in Wilmington, Del. He recalls a client who taught him that assessing risk tolerance requires deeper inquiry than simply checking boxes — and that the meaning of “conservative” differs from one client to the next.

About a year ago, I began working with a retired client whose assets were concentrated in a variable annuity, which he had been told was guaranteed to earn a higher rate of return than a savings account or certificate of deposit. When we first met, he described himself to me as risk averse and very conservative.

One of the first things I always do with new clients is dig deeper into some of the things they may not have gone over with their previous advisor. We talk about topics like goals and risk tolerance, but I also make a point to talk about their deeper motivations for investing as well. Though this client had been investing for many years, this was the first conversation he’d had with an advisor about his motivations, his family dynamics and how his comfort with risk would impact his long-term financial goals.

We had a long conversation about what “conservative” meant to him. From my work through the years I’ve learned that some people in the conservative category may feel like they cannot take any risk whatsoever and cannot stand the thought of losing a dime, while others may be okay taking some risk as long as it’s calculated, meaningful and managed appropriately.

Through this conversation, I learned this client was actually comfortable taking moderate risks. Ultimately he was looking for modest growth over time with the flexibility to make large withdrawals. I explained to him that one of the key features of an annuity structure is that you’re paying a fee to an insurance provider for a guaranteed monthly payout in the future. Once we looked at his total financial picture we found that he really didn’t need this additional income.

We began the process of unwinding the annuity without triggering any surrender charges and reallocated these assets into a low-cost diversified ETF portfolio. This allowed him to lower his fees, seek growth opportunities, and most importantly, access his funds at any time without having to worry about the restrictions of the annuity structure.

For me, this interaction confirmed the importance of assessing risk regularly, especially with new clients and older clients who may not have truly talked in-depth about risk tolerance, particularly as it relates to the other aspects of their lives.

D. Norman Quynn

If this client had merely gone through and checked the boxes to determine his risk tolerance, he probably would’ve been assessed as a conservative investor and a variable annuity may have seemed like an appropriate product choice. But when we looked at the ancillary things going on — fixed income sources, goals to provide lump sum distributions throughout his lifetime and a desire for modest growth — we were in a better place to understand the full story and develop a plan that was right for him at this phase in his life.

Many clients, especially those who haven’t been exposed to holistic financial planning, may simply accept that their risk tolerance should remain static. Then they wind up with strategies that don’t reflect their current goals. As investors’ goals and financial situations change over the years, so does their relationship with risk. And these factors must be reassessed regularly to inform their asset allocation strategy.

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Tags:  Client retention , Investment strategies , Retirement planning , Insurance planning , Portfolio management , Behavioral finance , Capital One

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