Discussions around risk tolerance are a key part of building a strong business and deepening client relationships. To frame the conversation correctly, it’s important to create a thorough process to follow.
A structured process will help you document everything for compliance and avoid misunderstandings regarding financial decisions, says Evelyn Jacks, president of the Knowledge Bureau Inc. in Winnipeg.
“You’ll be very sure that you’re both on the same page,” she says.
Follow this expert advice to frame your conversations about risk:
>Define risk
Ask the client what risk and risk tolerance mean to them.
The term risk is often associated with the idea of losing money, says George Hartman, president of Market Logics Inc. in Toronto. But many people forget that low-yielding products can also be risky because they may not generate enough capital gains to meet their lifestyle requirements in retirement, Hartman adds.
Ensure that clients understand both of these risks.
>Listen carefully
Listen for “trigger questions” when talking to clients about risk. These can include important life situations or financial decisions that a client brings up, which need to be discussed in depth.
For example, take note when a client mentions plans to enroll in school, to get married or divorced, or any health issues regarding themselves or a family member, says Jacks.
Clients may also have questions about succession planning, starting a small business, or when to begin collecting Canada Pension Plan benefits.
By listening for these types of questions, you will better understand clients’ goals and attitude towards risk, says Jacks.
>Review their financial history
A look at clients’ past financial decisions will indicate their attitude towards risk.
Jacks suggests looking through three specific documents: their most recent personal net-worth statement, their financial plan and tax returns.
“In the context of explaining risk to your clients you really are going to have to understand their individual situation first,” she says.
>Use software tools
Various software profile tools can help you structure in depth conversations on risk.
Hartman suggests using profile tools such as PlanPlus Inc.’s Planit or FinaMetrica. Both of these software programs include a questionnaire that is more in depth than a KYC form.
“They ensure you have a full and adequate conversation around [risk],” he says.
FinaMetrica is a sophisticated program that incorporates behavioural finance and traditional ideas of risk, says Hartman. The software costs $1,646 for a two-year subscription, or $2,289 for three years.
Planit varies in cost, ranging from free access to $125 per month, depending on the program and features you choose.
>Present options to the client
Present clients with numerous options for a financial plan to allow them to choose the plan best suited to their risk tolerance.
Make a joint decision with your client about the most appropriate products for their short-term and long-term goals, says Jacks. Also, decide on a mutual strategy for measuring those goals over one to five years.
>Keep talking about it
A client’s perception of risk will change over time. Make risk a regular topic with clients to avoid misunderstandings.
“As part of your annual review with the client you need to check in and make sure that they’re attitude towards risk has not changed,” suggests Hartman.
IE