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Risk Tolerance Assessment

Risk Tolerance AssessmentIntroduction

Of all the information financial advisors should collect from their clients, probably the most important concerns their tolerance for risk. In fact, it's almost impossible to overstate the importance of accurately assessing a client's propensity for risk.

Our natural preference in life is for certainty. Yet we manage to live with uncertainty every day. For example, even the most sophisticated meteorological forecasts have little accuracy more than a few days ahead. But we can still say with confidence that one location has a better climate than another or that we prefer a particular time of year.

Risk assessment is very critical to the success of your financial plan and should be done by a trained professional, not an amateur. But the problem is many risk assessment tools are exactly that, amateur.

Even though the practice standards published by the Certified Financial Planner Board of Standards, the Association for Investment Management and Research, and the Investment Management Consultants Association all emphasize the importance of assessing a client's risk tolerance, none explain how you should go about making that assessment. A hodgepodge of techniques exist, but most are inadequate, leaving the bulk of the analysis to the advisor. For this reason, risk assessment has been the Achilles heel of the financial planning process.


The challenge for us as advisors is to find a good reliable method for testing clients and evaluating those test results with consistency. The science of psychometrics provides us with the foundation for a testing solution to help us meet that challenge. Psychometrics, a blend of psychology and statistics, is the science of test construction. It is an established discipline that provides standards against which tests can be evaluated.

Our risk assessment solution is provided through our strategic relationship with an Australian company named Fina Metrica. Four years in development, Fina Metrica's Risk Profiling system is, to our knowledge, the world's first web-based system to meet internationally accepted psychometric standards. The Fina Metrica system offers previously unattainable levels of validity, reliability and accuracy in risk tolerance assessment.

At Personal Financial Consulting, Inc., an understanding of a client's risk tolerance is the single most important factor in guiding clients towards a successful investment program. We hope you find this process informative and insightful as you move forward in the realization of your goals.

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Personal Financial Consultants
2177 Union Road
West Seneca, NY 14224

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