By Donald Ray Haas

In my January column, we began the New Year with a discussion of risk tolerance. Even though the column argued that risk tolerance questionnaire scores do not tell advisors which products to recommend, the financial services industry continues to use this information improperly in the advisor-client relationship. Only your clients’ needs, time frames, and resources determine the proper products and services to recommend. Instead, the questionnaire scores reveal how much clients understand about financial matters and what knowledge they may lack. Only then, armed with this knowledge, should you prepare your clients to make financial decisions that will help them accomplish their goals.

The key to moving clients from their initial comfort level to a more risk-appropriate comfort level is education.

February’s column focused on a planning tool I have used successfully for more than 25 years. In March, we discussed what clients’ risk tolerance level means--or their perception of their attitudes toward financial matters. For the advisor, the clients’ scores really indicate the degree of their understanding of how an investment or financial concept operates. From this information, an advisor can determine how much teaching is necessary to increase his clients’ comfort level. Sometimes, the scores tell us approximately how much time it will take to reach a comfort level that is compatible with the risk needed to accomplish the clients’ financial goals.

Educating your clients
The key to moving your clients from their initial comfort level to a more risk-appropriate comfort level is education. But your work is not yet done. Once a client successfully moves from a too high or too low risk tolerance level to the center, continue to monitor him closely. Often, a client will gravitate back to the original level. Also, the client may feel uncomfortable until a “healthy” time span has elapsed. Prevent your clients from this regression through education and handholding. Reassure them--especially during extremely volatile market conditions.

Evaluating and understanding a client’s financial attitude is necessary to avoid the total destruction of any portfolio. When there’s a crisis, a client with a low score--meaning one with a lack of understanding/knowledge--may sell prematurely. On the other hand, a client who is a more aggressive investor will sell slower-performing vehicles, which could totally unbalance even the best portfolio.

For example, in March 2000, one of my clients, who is an aggressive investor, wanted to sell everything and put his money in the technology sector. This would have been foolish, and I tactfully counseled him as to why he should not make this move. As you know, the NASDAQ went from 5,000 to under 2,000--a 60 percent drop. Fortunately, my client took the advice.

In trying to learn what makes your client tick, start with a risk tolerance questionnaire. Review the client’s current investment portfolio and its historical changes. Look at income tax returns, which provide additional insights into how the client has acted in the past. And, of course, interview the client in person. Be sure to subordinate your personal interest to that of the client’s. Develop thorough fact-finding techniques, improve your listening skills, and what is most important, really invest time in exploring each client’s situation.

Now, you’re probably thinking: “Who has the time for all this?” While it’s true that all of us need to make a living and our lives are extremely busy, you need to make the time for each client if you are going to hold yourself out as a professional financial advisor.

Think of it this way: Your commitment is the same whether you take the time to educate your client and develop his risk comfort level, or you try to find a new client. Remember, a long-term client has time to develop a high level of trust, which will inevitably result in the need for more financial products and services. This, in turn, will create more compensation for you.

But, maybe what is even more important, by spending time with your client, you will gain the utmost benefit by having done your job well.

Donald Ray Haas, CLU, ChFC, CFP, MSFS, of Southfield, Mich., has been an insurance agent and financial consultant for 45 years. He can be reached at 248-213-0101 or at Donaldhaas@aol.com

Donald Haas’s series: Retirement Planning

Determining Your Clients’ Risk Tolerance (January 2002)

Risky Business (February 2002)

Risk Assessment Questionnaire PDF

Understanding the Risk Tolerance Questionnaire (March 2002)

Risk Tolerance Revisited (April 2002)

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