Any investments based on the risk and return that the investor is able to take. This is used to analyze what kind of an investor he is. All the investors want to make the most of their investments however it is important that return is always balanced with risk. This is where doing a risk assessment becomes compulsory. The risk assessment lets the advisor know what investment is suitable for his client.
How does risk assessment benefit clients?
There are a number of benefits that an investor has when he goes through a risk assessment.
- The risk assessment process helps to develop a risk profile for the client and they will be based on their risk-taking an appetite. This is used to decide on how the asset allocation will be done for an individual client and what kind of an investment strategy should be used to be appropriate to match the client’s risk-taking appetite and his capacity. This is important for financial planning and it is important that the risk assessment procedure is scientific.
- When a client is a risk assessed his confidence in the system increases. This is because the investor knows now that the advisor is taking care to ensure that the investor’s risk and return profile is met. The advisor is not just guessing but making an informed decision and helping the client invest based on the client’s goals.
- The risk assessment is also a way in which the client’s attitude to risk and his tolerance is analyzed to help him make better and informed decisions in the future. They understand the ways in which their risk rating is being measured and they use this knowledge to help them make future investment decisions.
How does risk assessment benefit the advisor?
The advisors play a very crucial role and doing a client risk assessment benefits them in many ways too.
- The advisor will carry out a risk tolerance test and this will give him a detailed picture of the risk-taking the ability of his client. This will let him make suggestions and choose the appropriate investment tools and strategies. This will assist in the total process.
- Risk assessment helps to build trust and it helps the advisor have a relationship with his client
- In case of any dispute in the future, the advisor will be able to produce the risk tolerance test that has been totally employed. This protects the advisor in case any unexpected event happens and affects the client’s investment.