How to Determine a Client's Risk Tolerance
- 1). Acquire a risk tolerance test. Many are available free of charge at online sites such as MSN Money and Kiplinger. Most tests ask the same variety of questions, which often include a hypothetical situation and several possible courses of action. Questions may also inquire about objective facts, such as savings behavior and income. These types of questions target ability to tolerate risk, not the desire to tolerate risk.
- 2). Administer the test. Have your client complete the questionnaire. Most of these tests can be completed within 30 minutes. It is important to have the client answer honestly about what she believes she would actually do in the hypothetical situations. A client may wish to go skydiving, for example, but in reality would never actually go. The risk tolerance test is designed capture actual behavior, not desired behavior.
- 3). Evaluate the client's responses. For online tests, the website will typically score the results for you. For print versions, you may need to do some very basic math to total the client's score. What is typically produced is a score measuring the client's ability and willingness to tolerate risk. These are two different elements with different applications. You may have a client with a very high risk tolerance, but very little disposable income, meaning this client cannot or should not engage in the level of risk she may find comfortable.
