A Simple Guide to Risk Profiling
Risk profiling is a process used to find the maximum level of investment risk for your client keeping in mind the risk required, risk capacity and risk tolerance, where
· Risk required is the risk related to the return required to accomplish the client’s goals from the available financial resources.
· Risk capacity is the level of financial risk the client is ready to take, and
· Risk tolerance is the degree of risk the client is comfortable with.
Risk required and risk capacities are financial attributes which is calculated using your software dedicated for financial planning. Risk tolerance is a psychological attribute which can be best determined through a psychometric test.
The real trick in risk profiling is to assess each of the characteristics separately so that they can be compared to each other. Risk capacity and risk tolerance are two separate constraints that clients consider while assessing financial goal. The chances are very slim for a client to achieve his goals from the resources available both within their risk tolerance and risk capacity.
If there is a mismatch found between risk required, risk capacity and risk tolerance, then it is the duty of the guide the client through the trade-off decisions which is required to derive a final solution.
The final step in the process of risk profiling is to make sure that the client has realistic risk and return expectations. This will help the advisor in giving properly informed consent to the client regarding the implementation of the investment strategy.
Finametrica Risk Profiling System
This system is a low-cost, user-friendly, and the quickest way to get more insightful understanding about the financial risk tolerance of your client. The major focus of Finametrica is on the psychological factors which are relevant to financial decision-making that would be meaningful to both individuals and their advisers.