Building the Ultimate Risk Tolerance Assessment

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Investor risk tolerance drives portfolio decisions, yet many financial advisors are rightly concerned about the accuracy of risk tolerance assessments. Why is it so hard? How can we get it right?

These questions came up in a recent podcast discussion I had with Doug Heikkinen. We talked about the events that led me to start Andes Wealth Technologies, how the risk tolerance tools were disconnected from the investor’s preferences and the portfolio decision, and how my training at MIT formed the foundation for a new approach to investor risk assessment.

Also, many people believe that risk tolerance is not stable, because an investor’s attitude towards equity changes when market conditions change. If risk tolerance is indeed unstable, why do we bother measuring it, not to mention using it to drive investment decisions?