Risk is a very definite term in understanding both for financial planners as well as their clients. Risk is measured, discussed and established to create a trust factor between client-advisor relationships. Individuals have their own primary needs such as shelter, food and safety to meet first then comes in demanding for high-order needs. We all individuals look forward to personal development and secure our lives for a better future and family. People become anxious and stressed while dealing with issues important to them but are also aware of the risks involved in the process.
Most people fall in the category of risk-avoiders rather than risk-takers. They tend to take easy decisions where there is less risk involved but are also satisfied with small amount return if not large. Money managers themselves failed to understand the concept of risk due to poor financial planning, over-confidence in profession and wrong business decision. This has been observed in many financial industries and not only the subordinates are responsible but also the higher authority people do not follow the theory of risk tolerance and its adverse effects. Moreover, many people tend to accept willingly the possible losses or gains while trading but some lose their patience which leads to high levels of anxiety, depression, sleep loss. Every client should be able to accept the levels of risk. Risk tolerance, a critical psychological concept involved in financial attitudes and planning. People should be ready to accept risk under any circumstances as it reflects one’s values, attitudes, beliefs and personal goals in the long run.
Levels involved in risk tolerance are social, physical, ethical and financial. The degree of uncertain outcomes from financial decisions in the organization is the summation for risk. Client’s allover perception and acceptance towards any risk is the backbone for finance. It is recommended for the advisers and planners to themselves understand the concept of risk and comfort zone they can provide to the targeted clients. Proper meetings should be arranged to deliver the impact of risks involved in very business and also take the feedback about each individual ready to undertake levels of investment risk.
Features of a Good Measure of Attitudes to Risk Tolerance
Key indicators of risk tolerance are in the form of levels such as validity and reliability. Validity caters to one of the test measures and how well it ensures in face validity and predictive validity. Reliability being the consistency of the test results for the test taker. In the process of risk tolerance test same result should be obtained for the same person during that period, then only the test will be considered reliable. Planners who wish to take the test should be accepting any form of risk tolerance.
In face validity there are relevant questions present which reflect the level of experience the client has in dealing with any issues that come on his way. Questions may be hypothetical due to variations in clients and their level of experience in financial management and risk. There may be lack of face validity if the client is not aware of the description of the hypothetical financial product resulting in wrong guessing of test score. For risk tolerance to be good the level of face validity should be high.
The performance measure is predicted through the test and the risk tolerance is measured from the observed match between a client’s score on the test and its attitude towards investment decisions. Clients who score more have high tolerance of risk and are capable of taking good investment decisions in any financial products.