Investment professionals are responsible to help investors continually determine what level and kind of risk they are willing to take with their investments.
In order to determine a client’s risk appetite, investment professionals often ask a client to complete a risk profile questionnaire. It’s a standard financial planning form and each firm typically develops their own or uses someone else’s. These questionnaires are typically 7 to 10 questions that attempt to measure the investor’s thoughts on the risks in the marketplace and how it might affect them inside their portfolio.
For example, a question might be something like, “If you lose 20% of the value of your portfolio, which of the following things might you do?
- Do nothing;
- Buy more;
- Move your money;
- Not sure what to do.”
When the client leaves the office, the investment professional has a baseline on which to ground the portfolio recommendations. They can choose investments that meet the client’s appetite for risk. However, it is important to update these questionnaires from time to time because the economy and risk factors continue to change.
In 2008, investors were nervous because the economy was experiencing real difficulty; risks were higher, appetite for risk taking actually dropped in our firm. So in 2008 - 2010 investors were answering risk questions differently than they are in 2014. We can't just file the risk questionnaires and put them away.
In our firm, we have instituted a new practice where every summer, after clients have fulfilled their tax obligations and have a good idea of where they stand financially, we ask them to reassess themselves in terms of their individual risk appetite. We tie this into their annual retirement/financial planning outlook.
We are looking into implementing a software application that will interact directly with the client. It will compare their current risk appetite to what they presently hold to see if they are aggressively investing in the market or not being aggressive enough.
We believe the risk should be reassessed at least annually; it is not good enough to take the risk questionnaire and then file it away. Investment professionals should ensure investment portfolios are continually monitored and not just perform a one-time task in order to get their compliance paperwork done.
As investors, clients who have not completed a risk appetite questionnaire for some time and who now feel differently about the markets should contact their investment professional. Clients should ask that their portfolio be reassessed to ensure their risk appetite is reflected in what they currently own.
Looking at one’s investment portfolio from a risk appetite perspective is a good thing to do and continually do over time. These are fast-moving times. We cannot be stale in our approach to the current economic environment.