Ability and willingness to take risk

CFA Level I Portfolio Management
#1

Ability and willingness to take risk

Question 1.

If a client’s willingness to take risk is significantly higher than his ability to take risk, what should the financial advisor do?

  1. Change the client’s personality
  2. Educate the client about risk and attempt to correct any misconception
  3. Base the client’s risk tolerance on IPS on his ability to take risk

Question 2.

If a client’s ability to take risk is significantly higher than his willingness to take risk, what should the financial advisor do?

  1. Change the client’s personality
  2. Educate the client about risk and attempt to correct any misconception
  3. Base the client’s risk tolerance on IPS on his willingness to take risk

If I remember correctly, the correct answer for question 1 is C and the answer for question 2 is B.

But I thought we should choose the more conservative one between the two (i.e:willingness and the ability to take risk). My question is why C is not the right answer in question 2?

#2

ok so willingness and ability. Always go with the lower of the two. If his ability to take risk is low, 100% go with it and do not try to change his mind at all.

If his ability to take risk is high, and his willingness is low, then you can try to educate, but ultimately, you still go with low risk.

#3

The rule in Q1 was a bit surprising to me. What if the client insists on higher risks and tells me that it is ultimately his own choice to gamble with his wealth? Does he need to look for a different portfolio manager?

#4

I would think that the average, rational person wouldn’t do this. Because that’s exactly what it is, gambling and no one wants to do this with money unless they’re addicted. In that case, they would waste it all at a casino.