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

Don't just think about risk tolerance when it comes to investments.
JUN 08, 2017

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.

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).

Latest News

NASAA moves to let state RIAs use client testimonials, aligning with SEC rule
NASAA moves to let state RIAs use client testimonials, aligning with SEC rule

A new proposal could end the ban on promoting client reviews in states like California and Connecticut, giving state-registered advisors a level playing field with their SEC-registered peers.

Could 401(k) plan participants gain from guided personalization?
Could 401(k) plan participants gain from guided personalization?

Morningstar research data show improved retirement trajectories for self-directors and allocators placed in managed accounts.

UBS sees a net loss of 111 financial advisors in the Americas during the second quarter
UBS sees a net loss of 111 financial advisors in the Americas during the second quarter

Some in the industry say that more UBS financial advisors this year will be heading for the exits.

JPMorgan reopens fight with fintechs, crypto over fees for customer data
JPMorgan reopens fight with fintechs, crypto over fees for customer data

The Wall Street giant has blasted data middlemen as digital freeloaders, but tech firms and consumer advocates are pushing back.

The average retiree is facing $173K in health care costs, Fidelity says
The average retiree is facing $173K in health care costs, Fidelity says

Research reveals a 4% year-on-year increase in expenses that one in five Americans, including one-quarter of Gen Xers, say they have not planned for.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.