Helping Clients Find Their Risk Tolerance is Not Easy

Risk ToleranceLearn about the factors affecting risk tolerance with the help of Summit Brokerage

Finding one’s risk tolerance as an investor plays a key role in successful investing and reaching your client’s finance goals. But finding your client’s risk tolerance isn’t always a simple task. Many factors affecting risk tolerance exist, and while a client may look at a finance scenario on paper and think he or she could handle the level of risk involved, this may not always be the case when the same scenario happens in real life.

To help clients find their appropriate risk level, let’s start with a basic risk tolerance definition first. According to Investopedia, risk tolerance is the “degree of variability in investment returns that an investor is willing to endure.” As an integral part of investing, it is imperative for your client to determine his or her ability and willingness to handle ups and downs in the value of their investments. One way to help a client determine risk tolerance is by having them fill out a questionnaire that looks at past scenarios of worst-case declines in different asset classes. It is also helpful to determine one’s risk tolerance by taking into account how long your client is seeking to invest for, other assets available, if pensions, Social Security or an inheritance will be factored in, and what their earning capacity is.

Now that we are more familiar with the risk tolerance definition, let’s take a closer look at three classes of risk tolerance:

1. Conservative Risk Tolerance

This is an ideal category for the client who wants little risk and little to no unpredictability in their investments. In many cases, you will find that clients who fall into this category have spent a long time creating a solid nest egg and are not willing to lose their principal investment. Consider investment vehicles that are more stable and guaranteed, such as CDs, money markets or US Treasury bonds.

2. Moderate Risk Tolerance

Clients who fall into this category are typically willing to accept some risk to their principal investment, but are also looking for some level of security. You might consider a moderate investment structure of 50/50, with a combination of mutual finds with decrease risk securities.

Investing in mutual funds is subject to risk and potential loss of principal. There is no assurance or certainty that any investment or strategy will be successful in meeting its objectives.  Investors should consider the investment objectives, risks and charges, and expenses of the fund carefully before investing.  The prospectus contains this and other information about the funds.  Contact the issuing firm to obtain a prospectus, which should be read carefully before investing or sending money.

3. High Risk Tolerance, or Aggressive Risk Tolerance

Clients who can withstand more risk are typically investment-savvy and understand the gambles involved with volatile investment vehicles. These clients acknowledge an investment may offer a maximum return or decrease to little or nothing in value.

To better help someone determine their risk tolerance, it is also wise to approach them with several “what if” scenarios. This can include a series of questions you can tweak depending on the client. Consider asking: What would you do if your $500,000 account drops to $300,000? How will you react? Would you reach out to me at that point? And would you understand that we may not sell at that time but might purchase more?

You can bullet point these “what if” scenarios on paper, and take notes below each section based on your client’s answers. Then ask your client to sign and date the document, which you or the client can revert back to in the future if necessary.


To learn about other factors affecting risk tolerance and how to help your client determine his or her risk level, visit Summit Brokerage Services has been voted the #1 boutique independent broker dealer in the country. Let us show you why! To experience the Summit difference, learn more about our network of independent financial advisors, and begin creating your financial planning documents, visit or call us at (800) 354-5528.


About Summit Brokerage Services, Inc.

Summit Brokerage Services is part of Cetera Financial Group. Summit Brokerage provides a broad range of securities brokerage and investment services to primarily individual investors. Summit Brokerage also sells insurance products, predominantly fixed and variable annuities and life insurance through its subsidiary, SBS Insurance Agency of Florida. Summit Brokerage also provides asset management services through its investment advisor, Summit Financial Group, Inc.


About Cetera Financial Group

Cetera Financial Group® (“Cetera”) is a leading network of independent retail broker-dealers empowering the delivery of objective financial planning advice to individuals, families and company retirement plans across the country through trusted financial advisors and financial institutions.  Cetera is the second-largest independent financial advisor network in the nation by number of advisors, as well as a leading provider of retail services to the investment programs of banks and credit unions.

Through its multiple distinct firms, Cetera offers independent and institutions-based advisors the benefits of a large, established broker-dealer and registered investment adviser, while serving advisors and institutions in a way that is customized to their needs and aspirations.  Independent financial advisor support resources offered through Cetera include award-winning wealth management and financial planning and advisory platforms, comprehensive broker-dealer and registered investment adviser services, practice management support and innovative technology.  For more information, visit

*”Cetera Financial Group” refers to the network of retail independent broker-dealers encompassing, among others, Cetera Advisors, Cetera Advisor Networks, Cetera Financial Institutions, Cetera Financial Specialists, First Allied Securities, Girard Securities, and Summit Brokerage Services.


All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.

Content created by Summit Brokerage Services, Inc.



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