Risk Capacity vs. Tolerance–OnPointe Stats after 5k Risk Questionnaires
In 2020 I wrote an article titled: It’s Time to Stop Ignoring (or underutilizing) Risk Capacity. If you haven’t read it, you can by clicking on the following link:
–Risk Tolerance—how clients “feel” about risk in the stock market.
–Risk Capacity—a client’s “financial ability” to take risk (it doesn’t matter how they feel).
To put it simply, EVERY advisor who sells FIAs, IULs, or WL policies or manages money (65, 7, etc., licensed) should be using a client questionnaire that quantifies Risk Tolerance and Risk Capacity.
Unfortunately, the most popular Risk Analysis program in the marketplace DOES NOT calculate a separate score for Risk Capacity.
When we built OnPointe Risk Analyzer, we built it to be the most accurate risk software in the industry and that meant we had to calculate Risk Capacity and Risk Tolerance as separate numbers.
If you have not tried the OnPointe client questionnaire, you can do so by clicking on the following link (embedded in the questionnaire are the 3-Bucket wealth-building questions):
5,000 Client Questionnaires
We pulled the Risk Capacity and Tolerance data from the last 5,000 people who’ve taken the questionnaire. The statistics are very interesting (scale 1-100).
The Risk Capacity variance is what’s interesting. The average variance difference between a consumer’s Risk Tolerance and Risk Capacity score is 12 (up or down).
Ages 31-70 had an average variance where they had HIGHER Risk Tolerance than Risk Capacity. The younger clients had a HIGHER Risk Capacity (this is because they have many more years to build their wealth and can withstand large drawdown in the market).
What do these numbers tell us?
That Risk Capacity should be talked about with EVERY client. Anytime there is a variance of 10 points or more between the Tolerance and Capacity scores, we highly recommend advisors sit down to discuss both in detail with clients.
Far too many advisors focus solely on Risk Tolerance and this is a mistake. It can lead to unsuitable recommendations being made.
Roccy DeFrancesco, JD, CAPP, CMP
Founder, The Wealth Preservation Institute
Co-Founder, The Asset Protection Society