Understanding the Risk Comfort score

What does Risk Comfort score mean?

Risk Comfort scores measure the utility (read: satisfaction) clients get from each of the investment options your firm offers. It is measured on a scale of 0% to 100%, where 100% represents a perfect alignment of their risk preferences and the investment option, and 0% represents a complete misalignment (e.g., a very aggressive risk taker could receive a 0% Risk Comfort score for the most conservative risk level offered).

Read more about how we incorporate your model portfolios.

What information goes into a Risk Comfort score?

We use your expected return and expected volatility estimates to create your efficient frontier, and we overlay the client’s risk preferences to measure how comfortable the client is in each model portfolio. Each client’s risk preferences are made up of their Attitude to Risk and Sensitivity to Loss scores.

How should you interpret Risk Comfort scores?

The scores reveal how comfortable the client would be across each investment option. In the above example, the client has their highest Risk Comfort score (85%) in the Aggressive investment option, with decreasing levels of comfort as the client takes more or less risk. We see that the client would be more comfortable with the decreased risk of the Moderately aggressive option (77% comfort) than the increased return of the High Growth option (68% comfort).

Although the client’s highest Risk Comfort score is in the Aggressive option, their goals and constraints should also be considered when recommending a portfolio. We leave it up to your expertise as the client’s adviser to discuss what investment choice makes the most sense.

What is Comfort Zone? 

The Comfort Zone is designed to help illustrate to your clients where they have high levels of risk comfort. The Comfort Zone covers all portfolios with a Risk Comfort score of 60% or above. 60% was chosen as the threshold based on statistical testing and consideration of the underlying risk preference utility models.

You can expect that:

• If you have four investment options, then a client will usually have two in their Comfort Zone.
• If you have five investment options, then a client will usually have two or three in their Comfort Zone.
• If you have six investment options, then a client will usually have three in their Comfort Zone.

60% should not be taken as a hard cut-off. In other words, a client does not abruptly become uncomfortable if they have a portfolio with a Comfort Score of 59% rather than 60%. It is up to your judgement what investment options are suitable or not suitable for your client, based on their comfort with risk, financial goals, and constraints.

The Risk Comfort scores and Comfort Zone present an opportunity for you to demonstrate to your clients that you deeply understand their risk preferences, and help clients identify the best investment options for them.

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If not, please feel free to reach out to us at customer-support@capitalpreferences.com