IPS Question

A hypothetical scenarios and what should we do re: Risk Tolerance Individual IPS - Super rich client, but has a very low risk tolerance due to his parents losing all their money. Ability: Above Average because he is rich Willingness: Below Average based on a survey What is his overall risk tolerance?

Below average - lower of 2

Below average and I am recommending client education to try and get ability and willingness to more closely align.

Overall: Below Average, Recomment reconciling the difference and see if he could up his willingness by a notch.

if it was the other way around, where ability = below avg and willingness = above average, do you say overall = average and recommend educating the client?

still below average

^ Then I would just say “Overall: Below Average”. Because you cant force a person to up his ability and then make him file for personal bankruptcy.

I wouldnt recommend education either if ability is below willignenss, unless the client isnt going to sign the IPS… But this isnt a test where you can have that argument with your client…

yup below average, client wishes, but prob should educate the client on their ability to take risks.

Assuming he’s not nudging retirement, Why not average and recommend counselling? Or has schweser warped me?

If there is a mismatch, then go with the lower of the two.

Sorry to hammer this one, but I thought that if there was a significant mismatch with above average on ability side and below average on willingness you meet in the middle and recommend counseling. Health warning: this understanding came out of the back of a schweser exam book (bottom of P186 2010 exam book 1) and I haven’t looked for it in the CFA book. This being the only exception to the rule you’ve rightly stated that ordinarily you opt for the lower of the two

Right - think about the other way - ability might be low, but willingness is high. so you have to settle with low (with education of course)

Totally with you on that one. So is the besst summary: (1) You always opt with the lower of the willingness/ability; or (2) You always opt with the lower of the willingness/ability,the only exception being: Where ability is disporportionately high there is a long time to retirement; and willingness is low, whereby you recommend average overall. [Where willingness is very high and ability is lower this exception dows not apply and you go with your rating for ability] Thanks