The ROI of Getting Risk Profiling Right

Risk profiling is a foundational interaction between advisors and their clients. It sets the stage for the advisor-client relationship to come and establishes the advisor’s initial understanding of the client’s risk preferences.

However, many advisors still treat risk profiling as a client experience hurdle to be sped through or as a compliance “tick the box.” From our research and industry experience, we know that this is a losing strategy.

We’ve observed divergent levels of success for advisors who deliver a high-quality vs. low-quality risk readouts to their clients.

Advisors who deliver a strongly rated risk readout have nearly double the NPS, a greater intent to increase AUM, and are viewed as more valuable for the fees clients pay than advisors who deliver a weakly rated risk readout.

Today, only 38% of clients receive a high-quality risk profiling experience, presenting an opportunity for advisors who can get risk profiling right.

The strength of risk readout is only as good as the methodology used to understand a client’s risk preferences. In this light, risk tolerance questionnaires are inadequate for delivering a strong risk readout, as they are not grounded in economic theory, are subject to bias, and deliver an uninspiring “tick the box” client experience.

A strong risk readout is only as strong as the data your risk profiling experience provides advisors about their clients. Revealed Preferences methods, such as Capital Preferences’ Risk Activity, is grounded in behavioral economics and gives advisors a mathematically optimal preference and portfolio mapping for each client based on their unique preferences.

Equipped with strong risk readout with each client’s Attitude to Risk, Sensitivity to Loss, and Risk Comfort scores, you as an advisor can augment what you already do best: helping your clients achieve their financial goals and peace of mind.

*A strongly rated risk readout is based on clients answered “agree” or better on the following statements about their most recent risk profiling experience:

• I have high confidence that the risk profile accurately accounts for my individual risk attitude.

• My advisor provided a very clear explanation of the results.

• My advisor facilitated an insightful discussion about what my risk attitude means for my investments and/or financial plan.

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