What is risk tolerance and why do we measure it?

Risk tolerance is how emotionally comfortable a person is with taking financial risk. For example, how much a person is willing for their portfolio to diminish for a chance to make bigger returns. It is psychological and is best measured with a psychometric tool.

By knowing how comfortable a client is with investment ups and downs, advisors can make sure their clients don’t panic, or worse, blame the advisor when a risk is realised.

Risk Tolerance and Risk Profiling

Risk profiling is a process for finding the optimal level of investment risk for your client by balancing their risk required, risk capacity and their individual risk tolerance.

Risk Required
Risk Required is the risk associated with the return required to achieve the client's goals from the financial resources available.
Risk Capacity
Risk Capacity is the level of financial risk the client can afford to take.
Risk Tolerance
Risk Tolerance is the level of financial risk the client is emotionally comfortable with.
There is often a mismatch between risk required, capacity and tolerance. FinaMetrica helps you to identify mismatches and resolve them with your client.