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This report provides a comprehensive framework that financial advisors can use when developing investment risk profiles for clients. The guidelines can also help advisors incorporate commercial risk assessment tools and meet regulatory requirements.


Investment Risk Profiling: A Guide for Financial Advisors

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Overview

Assessing a client’s risk tolerance is fundamental to a financial advisor’s ability to add value to his or her relationship with the client. Without risk, there is no reward in modern markets, yet calibrating the appropriate amount of risk for each client is far from a consistent process. This issue is of interest to regulators, who wish to avoid incidents in which clients are recommended investments that are not suitable for them or in their best interests because of the variability of returns and realized losses. Many advisors are generally aware of the signals from investors and their circumstances that guide appropriate portfolio design and often align portfolio risk with an investor’s age. Others use commercial tools to compare risk “scores” attributed to a client and a portfolio, and find that their initial conversation with an investor to reconcile these scores provides an excellent foundation for relationship development. Risk should always be on the minds of both investors and their advisors.

Investment Risk Profiling: A Guide for Investors presents a comprehensive approach to client risk profiling that accounts for both the financial and behavioral elements of a client’s investment risk profile. It suggests best practices for accounting for all the elements of the three dimensions that should characterize a client risk assessment, while allowing the advisor to also apply appropriate professional judgment. It suggests how commercial risk assessment tools can be evaluated and incorporated into the portfolio development process, guiding advisors to a robust foundation for portfolio strategy and design.

About the Author(s)

Amy Hubble, CFA
Amy Hubble CFA

Amy Hubble, CFA, is the founder and principal investment advisor of Radix Financial, LLC, an independent RIA firm specializing in research-based investment management. Based in the Cayman Islands, she also provides international investment consulting for Helix Advisory Services and Vos Pension. An active public speaker, published researcher, and financial educator, Dr. Hubble frequently collaborates on research aimed at improving behavioral outcomes of financial planning through investment risk profile assessment, strategic asset allocation, and the identification (and avoidance) of adviser biases. She holds the CFP designation. Dr. Hubble earned an MBA from the University of Oklahoma and a PhD in consumer economics and financial planning from the University of Georgia.

John E. Grable

John E. Grable is a Professor of Financial Planning, Financial Planning Performance Lab, University of Georgia.

Bob Dannhauser
Bob Dannhauser CFA, FRM, CAIA

Bob Dannhauser, CFA, FRM, CAIA, is senior advisor to The Investment Integration Project, an applied research and consulting firm focusing on the systemic environmental, social, and governance effects of asset owner and asset manager decisions. He is the former head of Global Private Wealth Management at CFA Institute, where he was responsible for CFA Institute initiatives related to private wealth management, including content development for PWM practitioners, positioning of the CFA Institute brand to investors and practitioners in this space, and development of strategy. He previously served as head of global capital markets policy, and head of professional standards at CFA Institute. He served on the CFA Institute Reserves investment committee, and formerly chaired the CFA Institute 401-k investment committee. He has over 25 years' experience working in client-facing roles with a broad range of corporate, public fund, eleemosynary, multiemployer, and high net worth clients with several leading asset management firms. Bob earned his MBA from Cornell University, his MPH from the University of Medicine and Dentistry of New Jersey, and his BA from the George Washington University.

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