How to Make Risk Assessment Specific and Ongoing
Merely lumping clients into one of three simplified risk categories may not be enough in light of the Department of Labor’s fiduciary rule, Mark Friedenthal writes on WealthManagement.com.
The rule, which requires retirement advisors to put clients’ interests first and went into effect last month, will also require advisors to show a deeper understanding of their clients’ goals and circumstances, according to Friedenthal, founder of risk assessment tool Tolerisk. The 10-point questionnaires currently in place for risk assessment may not be enough to demonstrate that understanding, he writes.
Simply assigning one of three profiles — conservative, moderate, or aggressive — is not sufficiently specific, according to Friedenthal. What’s more, the timing of switching from one profile to another can drastically affect account performance, he writes. Opting for the conservative stance during a market trough could substantially lower returns, for example, according to Friedenthal.
Current risk assessment methodology is also too focused on personality, he writes. Instead, any assessment must take into account a client’s ability to take on risk and put it above the client’s personality, according to Friedenthal. Advisors must also keep in mind that clients’ risk tolerance changes over time and should thus be assessed on an ongoing basis, he writes. Unsurprisingly, Friedenthal, as the founder of a risk assessment platform provider, suggests advisors recruit the help of technology to help them better assess and monitor their clients’ risk tolerance.