I dont undeerstand the answer- can someone explain. Question is that the due diligence items would more likely be evaluated by an individual investor rather than by an institutional investor why is ‘Potential for decision risk’ the right answer and not ‘determine suitability’
Decision risk is the risk of changing strategies or exiting a strategy at the worst time or point of max loss, so can often be due to an emotional bias. Since individual investors are more prone to acting on emotions than institutional it is more important to review decision risk for an individual investor.
Individuals usually have decision risk, i.e. wanting to quit an illiquid investment early and face huge losses. Institutions don’t have it, I guess because they are more sophisticated and know what it means that money isn’t available for a while.
If you tell an individual that his investment won’t be available for 10 years, most people won’t realize what that really means. They’ll invest and regret it when they need the money after 5 years.
Suitability is something that needs to be determined for every investor.
Thanks. This is helpful
For individuals, you are taking about your/their money. They are much more emotionally tied to it. Institutional investors don’t have the same type of attachment to the money they are managing.
Real life example: My firm had a client that was in a balanced portoflio. He couldn’t stomach the losses of the '08 financial crisis and against our repeated advice instructed us to liquidate his holdings in early March of '09. He could not have timed it any worse. The S&P has tripled since those early lows of March '09…that is decision risk.