Ask the Hammer: What's the Value of a Risk Tolerance Questionnaire?
Robert Powell, CFP®
What's the use and value of risk tolerance questionnaires?
That's the question recently posed to Jeffrey Levine, director of advanced planning at Buckingham Wealth Partners.
Risk tolerance questionnaires or RTQs are used to help advisers and investors determine how much risk an investor is willing to take with their portfolio, what kind of losses they are willing to accept.
But some RTQs are better than others. A simple three-question RTQ isn't really of benefit to anyone... except perhaps to the brokerage firm which needs liability protection when things go south with a client's portfolio. "In large part, you're not really going to get a volume or a dearth of information from three questions," said Levine.
On the other, many firms are now offering sophisticated RTQs which if used in combination with a person's risk capacity can be helpful, according to Levine.
Risk capacity, to some experts, is the amount of money a person can lose in their portfolio without it affecting their standard of living.