Risk Tolerance Suitability

Clients must understand risk and the risk/return trade-off that affects all investments. The greater the risk, the greater the potential return, coupled with the greater potential for losses. When we talk about risk, we are talking about volatility, and certain clients will understand the concept better in this light.

When we ask a client what their tolerance for risk is, we are referring to the assets they hold within a particular account. A client may be prepared to take additional risk with their open money account than with their registered retirement account. Other clients may be adverse to greater risk in any of their accounts. We are also concerned only with the assets that the client holds with SAFG and not their full investment portfolio, which may be partially managed elsewhere and which may have different objectives. This area will require the greatest discussion with the client and will receive the most scrutiny by supervisors and regulators. Make sure this subject is clear to the client.

Risk tolerance should be considered to be the lower of the investor’s willingness to accept risk and the investor’s ability to withstand declines in the value of his or her actual ability to withstand financial losses. Risk tolerance therefore should be determined as the lesser of both criteria.

In some cases, there is a difference between the risk a client is willing, or is able to take, and the return the client expects, which can result in a Broker assessing risk tolerance higher than it should be in an attempt to meet client expectation.

There are also instances where Brokers may be determining client risk tolerance as a result of a combination of other KYC criteria. While other KYC criteria, such as income, net worth, and time horizon, should be considered and discussed with clients when assisting them in understanding risk tolerance and how they factor in to risk and return, these criteria should not override the client’s ultimate assessment of their actual willingness and ability to accept risk. Brokers cannot substitute their judgment for that of the client.