Jun 1, 2011 12:00 PM

It's time to augment statistical measures with a new framework that focuses on a client's personal long-term goals

By Elizabeth K. Miller

Since the financial crisis of 2008, global markets have been surprisingly resilient. Investors who continued to follow disciplined strategies have recovered much of their losses, if not their confidence. Professional advisors have all worked hard to deliver their best analyses, assessments and advice to clients throughout this uncertain time. Today, as clients begin to feel more comfortable, there's still much uncertainty as to the future and stability of financial markets. Therefore, it's a fitting time to consider how to better assess investors' understanding and tolerance for risk before another significant market disruption.

As an industry, advisors and the financial media repeatedly communicate that risk and return are inseparable. What investors most often hear, however, is that higher risk leads to higher returns. They don't hear that higher risk might potentially lead to higher returns, but also might potentially lead to losses that are personally devastating. Since any investment program involves the risk of loss, it's vitally important for professionals to know how to discuss and understand risk. Professional advisors have spent years refining questionnaires, modeling techniques and reporting measures, all in an effort to capture and understand clients' financial “risk tolerance.” But as seen yet again in 2008, these efforts have repeatedly failed in the real world. One of the reasons for failure, I believe, is that there's a profound disconnect between common measures of risk and investors' personal conclusions about risk.

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Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
2010 Tax Act News	Industry Trends Surveys

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