Revisiting risk

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Risk is a poorly understood concept at the best of times. Some part of human nature is easily lulled into complacency during long periods of growth — the thought that medium risk mutual funds could lose 20% or 30% seems inconceivable, except in theoretical "worst case scenarios." Unfortunately, today, many of those worst case scenarios have actually come to pass.

Those clients who've already been through serious market corrections likely know and understand that the bad times can't last. (That said, they'd probably still like to hear from you!) But many might truly benefit, listen to and learn from a renewed discussion about the topic in a way they'll remember and refer to for a long time.

But what is there to say? If you think the risk tolerance discussion could use some new life, read on. This package examines how professionals in different industries consider or measure risk, client experiences and how all of this can inform a person's understanding of risk.

Perspective: More than one way to think about risk
Engineers, doctors and risk management experts — whether they're called that or not — come from every walk of life, and each approaches or understands the topic of risk in different, very personal ways. With that in mind, it's worth looking beyond the typical, overly familiar models used in financial services to consider how different people understand the concept. Read more.

Welcome to the flip side
Until recently, risk in the context of financial planning has only been a concept or an idea — some clients, even some advisors have never felt the full consequences of real downside action. The new reality setting in, though, as uncomfortable as it might be, is giving advisors a tremendous opportunity to reassure and educate clients who are actually in a position now to learn from experience. Read more.

Building a better risk profile
Experts say KYC questionnaires are really stupid. Innovative research in the field of behavioural finance also suggests that the investment industry has misjudged the risk tolerance of clients. Read more.

The risk list
It's generally accepted that having clients invested in properly diversified portfolios reduces their exposure to downside risks. Interestingly, adhering to this course of action across all client portfolios could also reduce downside risks for an advisor's book of business overall. Read more.

Talking to clients about risk
If clients weren't taking risk seriously before, they sure are now, and advisors should take advantage of this opportunity to discuss risk again. We asked a few seasoned advisors about the most effective ways they know to explain risk, and how they know when clients understand it. Read more.

(03/10/09)