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Do you have difficulty calculating your clients’ risk capacity? Have you been using in-effective and difficult questionnaires that give inaccurate results? If yes, Pocket Risk is here with the solution. Our risk capacity survey is all you need to initiate insightful conversations and cultivate a fruitful relationship with your clients.
Risk is an essential component of finance and investing. Identifying, quantifying, and assessing risk is frequently the first step in financial advisory. Risk profiling is a process that advisors use to help clients determine the optimal levels of investment risk. It seeks to identify the risk required to meet your investment objectives, as well as your risk capacity.
Our risk capacity surveys for advisors contain questions that will help you get all of the information you need to understand your client’s risk profile. Our surveys and questionnaires make it easier to assess risk, capacity, tolerance, and suitability, which can be difficult to assess otherwise.
Risk capacity quantifies how much risk a person can afford. It can be defined as a mathematical measure of how much risk your client can take on without risking irreparable damage to their investment goals.
Risk capacity is primarily determined by three factors: 1) time horizon, 2) investment portfolio size relative to future additions and withdrawals, and 3) the amount and reliability of income from sources other than your client’s investment portfolio. The rate of return information can then be used to help the investor decide what types of investments to make and how much risk to take on. Risk capacity is not determined by your clients’ feelings about risk. Instead, it is about how much risk they can afford to take.
It is dependent on their financial situation, as well as their age and the amount of time they have to invest. A simple example will demonstrate how these factors influence risk capacity. Assume a couple has saved $50,000 for the required down payment on a house they intend to purchase in one month. This couple has a very low-risk capacity because their time horizon is short, and they plan to invest 100 percent of the amount saved. However, if that same couple had $100,000 and was able to save additional funds from other sources, and the house purchase was five years away, they would be able to accept some investment risk in order to earn a higher return.
Despite their similar names and being equally important for risk profiling, your client’s risk capacity and risk tolerance are usually unrelated. Your client’s capacity, or how much loss they can bear, is determined by their personal financial situation.
If your client has a mortgage, their own business, or elderly parents who rely on them financially, they may be less likely (given their income needs) to comfortably bear a certain amount of loss than if they are single and have no major financial obligations. This information can be obtained using our risk capacity questionnaire.
Despite their similar names and being equally important for risk profiling, your client’s risk capacity and risk tolerance are usually unrelated. Your client’s capacity, or how much loss they can bear, is determined by their personal financial situation.
If your client has a mortgage, their own business, or elderly parents who rely on them financially, they may be less likely (given their income needs) to comfortably bear a certain amount of loss than if they are single and have no major financial obligations. This information can be obtained using our risk capacity questionnaire.
If you ask your clients, they will most likely respond that they are, of course, concerned about losing their hard-earned money. The question is how much loss they can handle for the possibility of greater rewards. It is therefore the financial advisor’s responsibility to design an investment strategy for clients through proper assessment of risk capacity and balancing their need for growth while taking into account other aspects.
We will work with you to provide the best advice possible to your clients. The time-consuming and complicated process of analyzing risk capacity can be made easy using our risk capacity survey.
