Lack of Risk Management Understanding Creates Opportunity

The markets have been experiencing more volatility lately and Knowledge Bureau Report’s October poll has uncovered an important opportunity for wealth advisors within the fray. The majority, 89.01 percent of respondants, told us that Canadians don’t understand their capacity for risk-taking – which is measurable - and this affects their level of risk tolerance when markets fluctuate.

But there is a problem that lands squarely in the investor’s lap: time and attention to risk management is required. Here’s what advisors, commenting on their experience with clients, tell us.

Robert highlighted one common challenge in the way people approach year-end investing: “Most people make year-end decisions in a rush without much forethought or planning. Their choices may not be based on their risk tolerance or anything other than ‘I need to make this investment now’ thinking.”

Maria pointed to the importance of professional advice to broach the subject of risk management: “Most of them do not know. They rely on professionals.”

Mary said that educating clients on risk management is a process: “It takes baby steps to make them stop and educate about the importance of risk tolerance and the idea of investing in the right stuff.”

Christopher says it’s all in the approach to risk assessment: “The industry does a poor job of defining risk. Risk should be defined as the probability of an outcome different than what one expects. In accessing risk (in my opinion) and the way I discuss risk with my clients is that risk has three distinct components to it. The first is the individual’s tolerance for risk; the second is the individual’s capacity for risk; and the third is the individual’s aptitude for risk. All three are very different. Most advisors only talk about risk tolerance.”

Stephen shares how a shift in focus can lead to better understanding: “When client understands their need of money in the short term vs the long term, they can allocate the level of risk more appropriately.”

Nikunji states that lack of time and attention contributes to limited understanding: “There is a huge lack of planning among most Canadians, as they are too busy in their day-to-day struggle and don’t have enough time to even think about it until the deadline approaches and make the choices based on whatever is easily available and done. At the time they think, will change it over afterwards and deal with it later and lose the opportunity and time.”

David states that maintaining open communication with clients is key: “I take great care in explaining risk to my clients and making sure they understand what impact it has on their portfolio. This is why I only get calls asking to put money in when the market crashes as opposed to wanting to take it out. I have had most of my clients for several years and they are comfortable asking me questions as I explain that a question is like a compliment. This allows them to feel free to ask and give me better insight as to what they are truly thinking.”

Finally, Marcia points out that soft skills matter when dealing with people’s anxieties, even if risk tolerance was previously discussed: “My clients don’t handle the risk/reward ratio well at all. They appreciate the technical points of it until it actually impacts their investment portfolio or capital contributions to other businesses. Then they experience great anxiety and they want to renege on their long-term strategies, rather than riding the wave and waiting things out, as we discuss beforehand. Being a financial advisor means using a lot of psychology and soothing people’s concerns. These soft skills matter more sometimes than financial aptitude.”

Additional Educational Resources: Acquire the unique mix of skills required to effectively help clients navigate risk-tolerance issues. Take the Portfolio Risk Management in Retirement course (a free trial is available!). Or, prioritize the development of your holistic wealth management approaches by taking the Real Wealth Manager  Program.

Thanks very much to all Knowledge Bureau Report readers who participated. Please weigh in on this month’s poll question:

“Have you noticed that CRA is starting to increase its service levels for you and your small business clients? “

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