The risk tolerance of a client consists of the losses acceptable to a client and the risk the client is willing to take. Because these elements are contradictory in nature, they will need to be evaluated individually. The maximum risk profile limits the number of options in investment profiles.

How much risk can a client bear?

The risk attitude of a client is one of the hardest aspects of the client profile. It is important to make this risk tangible. The largest risk of investing for the client is the risk of not meeting the set investment goals.

To make the risk tolerance tangible, in other words to determine the risk acceptance of a client, the SCOPE KYC Cloud solution uses scenario analysis tools. Based upon the results of various scenarios the client is given insight into the relation between returns and risk. This allows the client to reach a considered decision on the risk he is willing to take. The scenarios are designed to show the financial consequences of realising a smaller or higher capital than the goal at the end date. Using these tools, the adviser can find out what risk is acceptable for the client.

 

Subjective risk acceptance assessment; emotion and expected behaviour pictured 

In addition to the objective risk tolerance, which is primarily based on numbers and the capacity to handle losses, there is also the subjective risk tolerance. How does the client handle a decreasing stock value? Most investment managers don’t investigate a client’s subjective risk tolerance. The AFM believes that a subjective risk tolerance assessment should be a standard component in every KYCstock-taking. This is voiced in multiple publications and presentations.

In terms of subjective risk tolerance SMT is working with FinaMetrica. FinaMetrica has assembled a questionnaire with twelve easy to answer questions. Based upon the answers a client profile is created. The technology behind the process is scientifically proven, it has been used over a million times and it is self-learning.

The FinaMetrica profile dictates and limits the possible compositions of the investment portfolio by, for example, determining a maximum percentage of shares for a risk profile.