Series 66: 4.2.5. Risk Tolerance

4.2.5. Risk Tolerance

Advisers sometimes cross the line of reassuring cautious clients, using their expertise to convince a client to invest in something that ultimately serves the adviser’s goals. When this occurs, advisers can quickly find themselves losing accounts or, worse, in legal trouble. Understanding a client’s risk tolerance, or the amount of decline they can tolerate in both their broad portfolio and any one investment, is crucial to building long-term trust with clients.

Clients often won’t be able to tell you exactly what their risk tolerance is, so it falls on you as their adviser to help them explore what the concept might mean for them. Some standard definitions to include in your discussions with them are:

• Conservative risk tolerance. Investors who consider themselves conservative usually cannot tolerate even temporary minor declines in the val