5 Things Finance Advisors Factor In While Risk Profiling

Risk profiling is an important responsibility of financial advisors. To assess and suggest financial planning, they need every detail from their client, which can affect finances in any way. One of the things finance advisors look into is the degree of risk tolerance. They must ascertain whether and/or how far their clients are prepared to stomach losses. Therefore, risk profiling helps financial advisors create a plan for their clients based on, among other things, their risk-averse or risk-oriented temperament.
What good a finance advisor is if she can’t suggest the right investment plans for her client? Risk profiling cannot be taken for granted, and there are a series of factors she must necessarily consider. Of course, the ones I will mention below are not exhaustive but are most commonly considered during risk profiling. Let us take a look at the factors finance advisors consider during risk profiling:

1. Duration of risk
   Long-term investment goals are always welcome. A portfolio can take up riskier options when a client is willing to wait out returns for longer periods. High-risk investments come with fancy returns, but they have their own downfalls that can create short-term dents in financial planning. If the client is prepared to let the securities stay for long, then the short-term dents will gradually be removed, and consistent returns can be achieved. On the other hand, clients who are not willing to have long waiting periods, such as retirees, will have their portfolio not comprise riskier investments.

2. Goals
   The nature of risk depends on the nature of the goals the client has. While the duration of goals counts immensely and has been dealt with in the previous point, the kind of goals will require different treatment. For instance, clients saving for retirement can have an aggressive, risk-oriented portfolio, whereas those who have retired may not want to take risks with whatever savings they have.

3. Source of Income
   Risk profiling considers the appetite of the client to tolerate risks in his financial planning. Finance Advisors can only make educated suggestions provided they are apprised of their clients’ sources of income. Remember that the nature of the source is key to ascertaining the risk-taking appetite. For instance, a contractual work willing to indulge in financial planning will not be able to take risks as high as those with permanent employment. Similarly, those with generational wealth can take up higher risks than those without it. So, financial advisors will factor in where your money is coming from.

4. Circumstances back home
   Financial advisors will seek comprehensive information on their clients’ family backgrounds. They will factor in what responsibilities the client has back home. For example, if the client is the family’s sole breadwinner, then the portfolio cannot take too high risks; a balanced portfolio will have to be created based on his financial responsibilities at home. His investment strategies will consider his family’s long-term and short-term goals.

5. Emergencies
   There is no gainsaying that emergencies will inevitably be factored in risk profiling. Finance Advisors will have to determine whether their clients have enough liquidity to cover living expenses during emergencies. It is always a sound decision not to put all your money into risk-oriented securities and put some of it in low-risk accounts or as cash. Emergencies are called so because they are unwarranted and unexpected, and withdrawal from investments may be more of a knee-jerk reaction rather than an unavoidable option. To avoid such impulsive decisions, liquidity is always welcome. You should always have some readily available money.

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