Sometimes the risk tolerance question is difficult for clients because it involves using terminology that is not part of their daily vocabulary. Next time you ask a client about their tolerance for investment risk, try a different track. Find out the conditions they want to avoid.
Ask the client what routing preference they use when mapping out a trip. Do they always choose the fastest route, the shortest distance, most fuel-efficient route, or do they try to avoid highways?
Route selection is based on a number of things. The client might have a strong personal preference that outweighs other factors like current traffic conditions, or whether they are in a rush. Clients are also willing to accept a certain level of risk if they think that their selection will meet some of their criteria, for example, to save on gas.
Most often, however, the choice is driven by the desire to avoid certain conditions or risks inherent with those paths e.g., traffic, Sunday drivers, scenery, etc.
Routing preferences are one of the key differentiators among global positioning systems on the market today. Consumers want to customize their maps according to their preferences and the conditions they seek to avoid.
By the same token, investors want to have control over the route that they will take in their financial journey. They want to make a choice that allows them to avoid certain conditions.
“The fastest routes,” or “shortest distance” route might be too bumpy for their liking. Similarly, clients might want to avoid the rough terrain that goes along with stock investments. Instead, they might enjoy a “smoother ride” option, one that is marked by steady progress instead of wild fluctuations in speed. These are the types of investors who could be most interested in absolute return fund strategies. Clients interested in a “fuel efficient” option might do so because they want to avoid doing more damage to the environment than necessary. If so, these clients might also be interested in socially responsible investment alternatives.
Avoidance is a powerful motivator in determining what route a client will chose, whether it is on the road to Grandma’s, or the path to financial security.