How hard is it to really find out a person's appetite for investment risk? Is it enough to ask them directly or are there other ways to finding out less directly?
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Most advice businesses have a formal questioning process that attempts to determine a client’s appetite for risk. However it is merely a guide and most definitely more discussion is required to gain the necessary insight.
It’s always interesting discussing investment risk with clients. There are many factors that can influence an individual’s attitude to risk and many of these are emotional factors. Past investment experiences, either positive or negative, are very strong influences. Clients may also be heavily swayed by peer discussion or the media, which may lead them to conform and neglect their own attitudes to risk.
It is really important to discuss the client’s emotions in more detail and to gain an understanding of how their opinions have been shaped. Investment Risk is a concept that does invoke emotions, so there is no point trying to take emotion out of the equation. However, our role as Advisers is to also bring facts and insights into the mix so that our clients feel empowered to make the decision that is right for them.
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