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Risk tolerance can vary quite a bit from one person to the next. In fact, it can even vary for the same person as their circumstances evolve. For many, it’s rooted in their chronological ability to take risk. In other words, the further out in the future they are going to be using their money, the greater their ability to weather the proverbial storms that investment markets may experience. For other investors, the bigger constraint might be their personality. Most people have some degree of emotional tendency when it comes to bearing risk. So, when markets decline, at some point their discomfort can lead them to make an emotional mistake… selling after the market has declined because they just can’t take the rollercoaster any longer.

Honestly, Let’s Talk About Risk Tolerance

Advisors often confess that when it comes to answering questions, clients sometimes say what they think they should rather than how they feel. In a personality profile this can lead to unrealistic results or at the very least, inconsistent answers. When it comes to questions about cash-flows….well sometimes even with the best intentions, they just simply guess because they don’t really know. Both of these situations can present challenges for advisors who need to be able to rely on the information the client provides. Simply ignoring readily available information isn’t really a viable option, especially for an advisor in a fiduciary capacity.

According to an article published on ThinkAdvisor.com, advisors should not rely on how clients describe their willingness to accept risk, but instead should analyze their actual ability to endure risk. They cite a few key things to keep in mind when you conduct your risk tolerance assessment.

• Time horizon is not necessarily retirement – be sure to incorporate pre-retirement capital expenditures
• Even aggressive personalities may need to have reduced risk in their portfolios to be consistent with the time horizon of their usage
• Don’t try to convince conservative investors to take more risk – if their willingness to accept risk is the bigger constraint, it should be respected

How Can Tolerisk® Help Advisors Get the Truth

Tolerisk® not only allows you to incorporate cash-flows into your risk tolerance assessment (along with a personality assessment), but it also validates the assumptions the client presents. So, if your client isn’t being realistic or consistent, you can allow Tolerisk® to identify the situation and advise accordingly. This helps your client make better decisions and allows you to uphold your fiduciary responsibilities.

With Tolerisk®, you get a comprehensive analysis of the individual, and you get so much more than the vague, all-too-common, “moderate” risk level assessment at the end. Rather, you and your clients get a valuable report filled with data and actionable information regarding their individual risk tolerance and their probability of outliving their money.

Tolerisk® is the only risk tolerance assessment tool that provides advisors with a scientific way to determine both the willingness and ability of their client to take investment risk. To find out more about Tolerisk® and to see how it can help you make risk tolerance understandable and relatable, contact us today.

Managing their nest egg effectively is a top priority for many people, but it can be a daunting task. For many it falls into the same category as exercising, dieting, or cleaning out the garage. The thought of making investment decisions can feel paralyzing, which is why many people have come to rely on financial advisors. One of the biggest decisions for which investors desperately need assistance from their advisors is selecting the right risk directive for their portfolios…..not only now….but as their circumstances evolve.

Unfortunately, most advisors are still using simple risk tolerance quizzes, which were designed primarily as a basic compliance checklist item for advisors and not a way to tailor decisions for each client. Risk tolerance is a cumbersome topic even for seasoned professionals, and according to an article on CNBC, making this topic relatable to the average investor is even more challenging.

Why Does the Risk Tolerance Assessment Disconnect Exist?

• Many clients do not appreciate the impact of a poorly chosen risk directive and advisors often have a difficult time articulating the importance.
• Many advisors mistakenly rely on mediocre risk tolerance assessment questionnaires that produce generic results that don’t incorporate their expected cash-flows.
• Often clients may guess the answers to questions advisors ask reducing the reliability to the risk tolerance assessment results.

How Can Advisors Overcome it?

Advisors can implement educational tools to help their clients understand their risk tolerance and make better portfolio risk decisions. The best risk tolerance tools enable the advisor to incorporate the client’s personality as well as their cash-flows in the analysis. It should also provide an analysis of how realistic the assumptions provided by the clients are, so both advisor and client can be confident in the results and recommendations.

What Tolerisk® Can Do to Help

Tolerisk® is the tool that financial advisors need in order to completely and accurately explain risk tolerance to their clients. With Tolerisk®, financial advisors can conduct a scientific assessment of both the right level of risk for their client as well as the reasonableness of their assumptions. By taking into account cash-flows, mortality probability, personality, inflation, and market risks, Tolerisk® is able to compile comprehensive results that are completely customized to the individual client. Most importantly, advisors are provided with an easy-to-read report that allows them to best explain the risk tolerance assessment results to their clients.

Tolerisk® is the only risk tolerance assessment tool that provides advisors with a scientific way to determine both the willingness and ability of their client to take investment risk. To find out more about Tolerisk® and to see how it can help you make risk tolerance understandable and relatable, contact us today.

Financial Advisors take on great responsibilities when they manage the assets of their clients, especially advisors held to a fiduciary standard. In addition to ensuring the client has a diversified portfolio that is cost-effective, a client’s portfolio needs to be calibrated to the right level of risk for them….now and in the future.

Traditionally advisors used simple risk tolerance questionnaires that were required by their compliance officer. Neither the advisor nor the client put any real value in the output because it was overly simplistic and couldn’t reflect the client’s unique circumstances. According to Michael Kitces, as published on Financial-Planning.com, there are many risks to using these inadequate surveys within a financial advisory firm.

Identifying the Risks of Measuring Risk Tolerance Poorly

The typical risk tolerance questionnaire will simply address how comfortable an individual is with taking market risk. While this may measure a person’s willingness to accept risk, it does not account for their ability to take risk by incorporating their actual cash-flows. Without effectively incorporating such an important component of risk tolerance, advisors may not be recommending the best risk directive for their client.

A poorly selected risk directive means the client is either taking too much risk or too little. Both can have negative consequences. If the risk directive is too high, the client may be forced to liquidate risky assets at an inopportune time due to capital needs or limited emotional tolerance for risk. A risk directive that is too low means that long term performance is often sub-par, leading to reduced fruits of the client’s labor (delaying retirement date or reducing retirement lifestyle, or bequest).

A client using the wrong risk directive will likely eventually be dissatisfied. As such, they are less likely to continue utilizing your services and making referrals to your practice. Even worse, a dissatisfied client is more likely to file a complaint or pursue litigation, which can be a costly drain on resources.

What Do Advisors Need to Do to Minimize These Risks?

Financial advisors can minimize the risks of providing inadequate advice on a risk directive by investing in a high-quality risk tolerance assessment tool. It’s necessary to use a tool that scientifically measures a client’s actual ability to take risk and combines it with their willingness to accept risk. You’ll also want to make sure the technology in which you use helps you validate your client’s premise to make sure the advice you provide is based on realistic circumstances. It’s incumbent upon you to identify unrealistic circumstances and advise accordingly, prior to providing advice on a risk directive.

Why is Tolerisk® the Go-To Tool For Financial Advisors?

When it comes to choosing the most effective risk tolerance assessment tool, financial advisors should look no further than Tolerisk®.  This risk tolerance assessment software is designed to accurately determine a client’s willingness and ability to take risks by considering both cash-flow chronology as well as personality. It incorporates mortality probabilities to scientifically validate your client’s premise and increase the confidence you both have in the risk directive selected. Tolerisk® is the only risk tolerance assessment tool that uses a scientific approach, making it the most comprehensive choice for advisors to help their client’s select the right portfolio risk today and in the future. In addition, Tolerisk® compiles the results into a comprehensive report that demonstrates a high level of fiduciary duty of care.

To find out more information about Tolerisk® and how it can help you build better relationships with your clients, contact us today.

The average investor knows that there are tradeoffs between risk and reward when it comes to investing. But do they recognize the important role of accurately measuring their true risk tolerance? Do they understand why selecting the right risk level both now and in the future is so critical to their success in achieving their goals?

Most advisors confess that the answer is often “no.” Further, they say financial risk tolerance is often difficult to convey and make it meaningful.   So, here’s a crash-course in Risk Tolerance 101 so you can provide your clients with all they need to know about this critical concept.

Risk Tolerance: Willingness to Accept Risk vs. Ability to Take Risk – Know The Difference

True risk tolerance is the appropriate combination of an individual’s willingness to accept risk and their actual ability to take risk. These two critical components are independent and cannot be combined by simply adding or averaging them together.

A person’s ability to take risk is an objective analysis of the complete chronology of their cash-flows, which incorporates their assets, expenses, savings, capital inflows and outflows. Ideally, they should be analyzed incorporating differing tax consequences of cash-flows as well. The farther out in time a dollar is being used, the greater “its” ability to take risk. A dollar being used tomorrow has zero ability to take risk. So, a person’s ability to take risk is the aggregate combination of the ability for risk exposure of all of their future cash-flows.

A person’s willingness to accept risk indicates the point at which they will let their emotions facilitate a mistake in their investment decisions. The cost of such an emotional mistake often outweighs the long term benefit of having an otherwise greater risk level. A client’s willingness to accept risk becomes a more relevant constraint when their ability to take risk is higher. For a person with a very low ability to take risk, their personality may be irrelevant (e.g. if the client is using all of their savings to buy a house tomorrow, how they score on a personality profile is useless, since their ability to take risk with their funds is zero.)

A Good Risk Tolerance Assessment Process and Why You Need It

A risk tolerance assessment is the process of determining the client’s true risk tolerance and guiding them to select the best risk directive or model portfolio to achieve their goals. Unfortunately, most financial advisors fall victim to inadequate questionnaires that provide vague results for their clients. These questionnaires typically only account for a client’s willingness to accept risk without incorporating their ability to take risk into the equation. What financial advisors really need is a risk tolerance assessment tool that provides comprehensive and accurate results.

According to a Kiplinger article, financial advisors need to be both disciplined and objective when it comes to accurately determining the risk tolerance level of their clients. In addition, advisors need to utilize the right resources and tools. The right risk tolerance assessment tool will analyze the client’s willingness and ability to take market risk, providing reliable and actionable results for the advisor and client. By considering a variety of client specific factors, the risk tolerance assessment tool can produce superior results for both the advisor and their client.

When you’ve armed your clients with the information they need about true risk tolerance and the importance of a good risk tolerance assessment, you can turn your focus to advising them on selecting the right portfolio to achieve their goals.

With Tolerisk®, you are able to determine the true risk tolerance for each client and document your consistently diligent process for advising them on the right risk directive. Your comprehensive report is filled with actionable information helpful to you and your client. Your consistently custom approach will be appreciated by your clients as well as your compliance department. For more information on the benefits of Tolerisk®, contact us today.

Nationally-known brokerage firm Charles Schwab recently announced a new initiative — the Schwab Intelligent Advisory. This program is designed to serve an under-represented market in the financial advisory industry, providing clients with a customized financial plan, guidance and assistance from planning consultants as well as an automated, diversified portfolio. These services, which will be provided by certified financial planners, are going to be available for a significantly lower cost than traditional financial planning and wealth management services, and it could change the way that the financial advisory industry operates. Schwab intends to launch the program in the first half of 2017.

Joel Bruckenstein published his thoughts on this recent announcement on T3 Technology Hub, in a blog post titled: “Will Schwab Upend the Advisor Business?” Bruckenstein argues that Schwab is providing financial services to a set of clients who have not traditionally had access to these services, and the firm is taking advantage of an opportunity that has been ignored by other wealth management experts in the industry. Given the fact that Schwab is a brand with national recognition and satellite offices throughout the country, it has a decent chance of being successful in this endeavor.

Bruckenstein makes the following points in the article:

• Schwab has to compete with other brokerage firms that offer similar programs. However, the Schwab program is hands-down the most affordable option for clients who are interested in these services, and Schwab has the advantage of a well-oiled marketing machine.
• Schwab is running the risk of competing with its own team of advisors, which could adversely impact the company’s relations with its financial planners and advisors. Bruckenstein acknowledges that most advisors at Schwab will not be immediately threatened by the program, but it could cause dissent in the future.
• Bruckenstein recommends that financial advisors play close attention to the developing situation, as it certainly could have a significant impact on the wealth management industry and the strategies employed by financial advisors.

What Technology Can Advisors Use to Differentiate Themselves from Commoditized Management Services?

With the launch of the new service packages from Schwab, financial advisors should set their sights on diversifying their own packages and programs for their clients. Technology can help financial advisors and wealth management professionals improve the customer experience and boost their client satisfaction rates.

Tolerisk® is risk tolerance assessment software that can change the way that advisors do business. Designed to determine both the willingness and ability of an individual client to take investment risk, this innovative risk tolerance assessment tool provides a wide range of features that allow for accurate, customized results. With a Tolerisk® report, financial advisors can provide their clients with insight into their risk directive decisions, help them determine whether they will have enough resources throughout their lifetime and give them actionable steps they can take to improve their strategy.

To find out more about Tolerisk® and how this risk tolerance assessment software can improve your investment advisory business, begin your free demo today.

Retirement plays an important role in an individual’s overall wealth management strategy. Many people are investing their assets and hoping to grow their portfolios in order to achieve the wealth necessary to retire comfortably. With that being said, many people take into account the Social Security benefits that they will receive, and they work with their financial advisors in order to attempt to determine which age they will be able to retire.

Noting this, financial advisors should be aware that the full retirement age is scheduled to increase to 66 years and 2 months in 2017, and gradually increase to 67 by the year 2022. Michael Kitces, a financial expert who runs an industry blog, recently published an article titled: “Social Security Full Retirement Age Increase for First Time Since 2005.” The post explores the impact that this gradual age increase will have not only on retirees but spouses who will rely on their benefits as well.

What Do You Need to Know About the Social Security Age Increase?

• The gradual age increase that will take place during the next 5 years will impact a person’s decision as to when is the best time to retire. In 2017, with a full retirement age of 66 and 2 months, a person who wants to retire at age 62 will face a 25.83 percent deduction in their total benefits package. A person who delays retirement until the age of 70 will not see a notable increase in their benefits.
• Overall, the age increase will result in a minor average decrease in Social Security benefits across all age ranges, regardless of when an individual chooses to retire.
• The spousal reduction also will increase as the full retirement age is boosted to 66 and 2 months this year. A spouse who retires at age 62 will take a 30.85 percent reduction in benefits. This reduction will cap off at 35 percent by the year 2022 for any spouse who was born during or after 1960.

How Can Tolerisk® Help You Plan?

Tolerisk® is risk tolerance assessment software used by financial advisors to help determine a client’s ability and willingness to take risks with their wealth management strategies. It is the only risk tolerance assessment tool that incorporates cash-flows into the equation. When it comes to helping an individual plan for retirement, Tolerisk® uses factors such as annual mortality probabilities. These factors allow both advisors and their clients to improve their wealth management techniques to accommodate not only the duration of their retirement but also to provide survivors and heirs with any remaining assets.

In addition to incorporating factors such as mortality into an individual’s risk tolerance assessment report, Tolerisk® uses a variety of other factors in order to provide financial advisors with comprehensive and actionable data to relay to their clients. To find out more information about Tolerisk® risk tolerance assessment software, begin your free demo today.