Incorporating Investor Risk Tolerance Into The Financial Planning Process

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  • Robert W. Moreschi

Published 2004, "Incorporating Investor Risk Tolerance Into The Financial Planning Process", Journal of Personal Finance, 2004- Volume 3


  • This paper reviews the current accepted methods for estimating investor risk tolerance. The two main schools of thought, Expected Utility Theory and Behavioral Finance, are presented. For the advisor, we believe that Behavioral Finance is a more useful and practical foundation for understanding clients. The use of risk-profiling questionnaires for estimating risk tolerance is then presented and analyzed. Long-form questionnaires are generally more effective than short-form questionnaires because they are less likely to suffer from scoring bias and are less apt to have framing issues. When implementing risk tolerance scores into a financial plan, advisors are urged to not abandon the client interview. The interview is a necessary tool for understanding the many behavioral attributes that clients may exhibit.