Client Risk Assessment Benefits Everyone

Conducting a risk assessment with new clients makes business and legal sense.

On the legal side, a thorough, well-documented risk assessment is invaluable should a client file and Errors and Omissions claim alleging misunderstanding, confusion or unsuitability over an investment product.

A complete risk assessment won’t stop an unhappy client from suing you, but it is one of the first items your E & O policy underwriter will ask to see.

Three Parts of Risk Assessment

The benefits go far beyond mitigating any potential professional liability claim, however. Life and Health agents who take the time to work through risk attitude, risk tolerance and risk capacity – the investment risk triad – build strong client relationships built on trust.

In brief, the three parts are:

• Risk Attitude: Understanding of the concept of risk and its application in life and finances
• Risk Tolerance: Comfort with the likely level of volatility of an investment’s lifetime, based on past experience and future expectation
• Risk Capacity: Ability to absorb an investment loss or change in financial circumstances

Yet asking a client outright: “So, how do you feel about risk?” often won’t produce a helpful answer. Clients have an inherent bias about their own attitudes and may view themselves able to tolerate more risk than they can – or should. Using proprietary risk assessment tools and/or reputable third-party questionnaires and algorithms standardizes the process.

Benefits of Risk Profiling

Risk profiling tools also show clients that their advisors understand the importance of an objective assessment. Relying on “gut feelings,” whether they are your own or those of your clients, is unprofessional and unwise.

Remember, too, to talk about risk as part of any annual review with your client. A new house, a new baby, a long illness, a lost job or an inheritance can change one, two or three parts of the risk triad.

A better picture of a client risk attitude, tolerance and capacity gives agents details that streamline product choices for consideration. It gives clients useful information when they make other financial decisions.

A solid risk assessment also gives both parties two benefits you can’t put a price on – comfort and peace of mind.