Low risk tolerence client with high required rate of return

CFA Level III
#1

If the required rate of return for the client is 15% because of living expense. But the client’s ability to take risk is low.

How to deal with this? Risk tolerence overrides return requirement? Thanks.

#2

It’s difficult to change a client’s ability to take risk. Willingness, yes; ability, no.

The sober reality is that the client’s standard of living will have to be reduced.

#3

Thanks, austerity…

#4

Or increase the asset base if that is possible. smiley

#5

I’m not sure how you increase your asset base substantially without increasing your risk tolerance, short of assasinating a loaded aunt who’s named you in her will (which in and of itself requires a high risk tolerance),.

#6

This is an impossible situation to deal with…

If the client’s primary biases are cognitive (rather than emotional), then this is the perfect set-up to educate him/her.

#7

surprise

#8

That would help with the client’s willingness to tolerate risk.

Here, the problem is the client’s _ ability _ to tolerate risk.

#9

S2000- When I said that the client would need to be educated, I’m fully aware that his/her *ability* to take risk would not change. Even so, I feel like explaining what is (or in this case, isn’t) possible is still required to make the client more aware.

At the end of the day, I agree with your previous statement that the client will have to reduce his/her standard of living (after receiving an explanation/education/enlightenment from the advisor).

#10

I agree; I simply took issue with your discussion about biases: those generally have to do with willingness to take risk, not ability.

You’re correct: the client needs to know the cold, hard reality: their imagined lifestyle’s about to take a big hit.

#11

I am killing the aunt tonight