Does risk tolerance testing work for retirement investors?

So far this year the stock market has been a relentless ride of unnerving drops and sudden rebounds. Anxious clients are calling their financial advisers. The advisers remind clients that you have both agreed to a plan based on their risk tolerance and goals. That equation drives your portfolio allocation, but the more the ground falls out from under you, the more doubt may begin to creep in: Just how accurate was that risk tolerance profile?

Assessing investor risk tolerance is standard procedure for broker-dealers, who are required by FINRA rules to assess risk tolerance as part of its suitability standard for evaluating investments. Registered investment advisers must assess risk tolerance as part of their “duty of care” fiduciary obligations.

But there’s no broad agreement on the best way to do that or how to integrate an investor’s attitudes about risk into portfolios. A wide array of tools are available that can measure risk tolerance, but it’s just as important to assess an investor’s financial capacity for risk – and how much, or little, risk is necessary to meet retirement goals.

 

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