What We’re Doing Wrong with Risk Tolerance

 

Advisor Michael Kitces, high-profile author, speaker and expert in the industry, clues us in on the risk tolerance assessment within financial advising.

The video titled “What We’re Doing Wrong with Risk Tolerance,” featuring Michael Kitces, discusses the evolving landscape of risk tolerance assessments within financial advising. Kitces highlights the increasing scrutiny and importance of accurately assessing risk tolerance, especially in light of fiduciary duties under regulations like ERISA. He questions the adequacy of traditional, simplistic risk tolerance questionnaires and emphasizes the need for more sophisticated and defensible methods.

Kitces mentions the rise of third-party tools designed to improve risk tolerance assessments, pointing out that these tools leverage advancements in technology and behavioral finance. He notes that different approaches exist, from the gambling-style questions of Riskalyze to the psychometric methods of Finametrica and others, each offering unique insights and methods for evaluating risk tolerance.

Overall, Kitces is optimistic about the industry’s direction, with more tools becoming available to help advisors make better, more defensible decisions regarding client risk tolerance.

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