Adviser's Consultant: Incorporating clients' risk scores into all planning decisions

Don't just think about risk tolerance when it comes to investments

Jun 8, 2017 @ 5:13 pm

By Liz Skinner

+ Zoom

David Yeske believes advisers can help clients make smarter financial decisions if they take the client's risk tolerance into consideration more often.

Most advisers use a client's risk score to help decide how to invest their money, but it really should be a factor when they decide whether to pay off a mortgage or buy insurance — really about all financial decisions, said the co-founder of Yeske Buie.

It's especially crucial to make risk tolerance a consideration in decision-making if the client has particularly low or high scores.

"If I'm not paying attention to the fact that my client has an incredibly low or incredibly high risk tolerance, I'm going to have a blind spot when it comes to understanding how to facilitate the change they want to make," he said. "When it's very high or very low, it's most likely to lead to a problem."

(More: Adviser's Consultant: Creating a new service for client with smaller nest eggs)

It's all about how the adviser frames a decision, because that can really impact the decision they make.

David Yeske
+ Zoom
David Yeske

For instance, one of Mr. Yeske's clients decided to build their dream "Architectural Digest worthy" home a few years ago, even though he told them it would bring them close to running out of money in retirement with their project incurred extra costs.

The building had significant cost overruns and the couple may now have to sell their dream home in a few years to live on the proceeds. Looking back, Mr. Yeske said he wished he had reviewed the clients' very high risk tolerance score before he described the financial risks of building that home.

"If I had been more cognizant of the fact that I was dealing with two people who had high risk tolerance pegged off the end of the scale, I would have done more to try and heighten the awareness of the risks involved," he said. "I would have done more to shift their perception of the risk than I did."

By dialing up his presentation of the risk, he believes he might have gotten through to them.

Essentially, knowing someone's tolerance to risk is like knowing their money history and all the other things that go into the client's thinking and decision making. Showing how an adviser accounts for one's very high or very low risk score could even help them prove they have taken steps to act in a client's best interest, which is key under the Department of Labor's new fiduciary rule for retirement advice.

(More: Adviser's Consultant: Boosting female advisers inside and outside the firm)

"Understanding their tolerance risk allows us to advise clients better and more appropriately, just like understanding their family backgrounds and other history," he said.

Tip Sheet:

• Know a client's risk tolerance going into every planning conversation, and think about the best language to use to bring up a particular decision with the client.

• Review situations where client decisions have had negative outcomes, and look at whether knowing their tolerance score would have changed how you structured that particular discussion.

• Frame conversations with those who are particularly risk averse in ways that stress the benefits of a particular move. Their fear of risk may make it harder for them to recognize the advantages of the decision.

• If someone has a higher than average risk score, be sure to point out what can go wrong with the decision in exaggerated terms to make sure he or she really hears and understands the risks involved.

• When discussing insurance, make sure you know the client's risk tolerance to make sure they're not particularly inclined to over insure (low risk scores) or under insure (high risk scores).

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Sep 26

Webcast

Investing 2017: Industry at a Crossroads

The advice industry is at a unique inflection point, as the way clients are investing has changed dramatically: Technology has evolved, access to innovative products has changed, and the active vs. passive debate continues to rage on. Advisers... Learn more

Featured video

INTV

Ed Slott: The conversation advisers need to have with spousal IRA beneficiaries

Clients who inherit IRAs from their spouses need to decide whether to remain beneficiaries or do spousal rollovers. One important factor in that decision is their age, according to Ed Slott, founder of Ed Slott's Elite IRA Advisor Group.

Latest news & opinion

Advisers get more breathing room to make Form ADV changes

RIAs can enter '0' in some new parts of the document before their annual filing next year.

Since banking scandal, Wells Fargo advisers with more than $19.2 billion leave firm

Despite a trying year, the firm has said it will sweeten signing bonuses for veteran advisers.

Is LPL's deal sweet enough for NPH's 3,200 reps and advisers?

They will have to decide if the signing package they are being offered by LPL makes sense. A lot is hanging in the balance.

Eduardo Repetto to leave Dimensional Fund Advisors

Gerald O'Reilly, currently co-CIO, will take over as co-CEO with David Butler.

Alternative strategies boomed after crisis, but haven't been tested

Because the S&P 500 has outperformed, convincing clients they need protection is a hard sell.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print