WEALTHTECH INSIDER: Risk – The Discussion Every Advisor Needs to Have with a Client


Risk is a hazy term, even in the financial industry where it is ubiquitous.

Financial advisors and investors already know that risk is integral to creating a well-functioning investment portfolio for their clients—but chances are good that clients have a completely different perspective on risk, according to Orion Advisor Solutions.

Consumers tend to think of risk in accordance with one of two extremes, said Orion. They think of risk as something they cannot tolerate at all, or they focus solely on returns and “throw caution to the wind.”

Recently, a growing number of consumers seem to be gravitating towards the former extreme, with one recent study discovering that 62% of consumers would rather invest in real estate than stocks because of stocks’ unpredictable nature.

Yet do-it-yourself stock investing services, like Robinhood, and cryptocurrency exchanges remain popular with the do-it-yourself investing set. It’s hard to imagine that these investors had a good grasp on risk before being offered access to options and margin trading by trendy digital platforms.

Discussing risk can give investors the knowledge to make better decisions and the confidence to stick to their financial goals no matter what happens in the market, according to Orion.

To facilitate these conversations, Orion last year acquired HiddenLevers and launched a “3D Risk Profile” tool blending traditional risk profiling methodology with behavioral finance concepts to give advisors as much insight as possible into how their clients feel and think about risk—and how they might respond to events in the future.

Financial advisors clearly have a role to play in educating the public—or at least their clients—about risk, said Orion, which offered five effective ways to talk about risk.

Get Rid of the Jargon

One of the most important things effective advisors learn is to remove the jargon from their client conversations—most clients not only don’t understand concepts like alpha, beta, Sharpe ratios and standard deviations, but they don’t want to have to spend the time learning those concepts just to have a meaningful conversation with their advisor.

Jargon shows knowledge, but it doesn’t really show expertise. Instead, it reinforces the feeling that the client doesn’t know as much as the advisor, and in some cases can lead to adverse responses to recommendations.

For an advisor’s message to resonate, risk should be discussed in simple, explicit terms that make intuitive sense and that can be connected to the client.

Personalize It

Let’s face it—many of the topics we discuss in the financial field that are fascinating to us may not be the most exciting to prospects and clients. We can make these topics more relevant by avoiding generalities and getting straight to the facts about how risk impacts real-world investments.

The old method of gauging risk is no longer adequate, it was too impersonal—a client or prospect would fill out a risk-tolerance questionnaire, and based on their answers, would be placed into generic investment categories like “moderately aggressive.”

That’s not specific enough for today’s consumers. It’s more effective to bring a client’s real portfolio into the conversation and show them in percentages and real-dollar accounts what could happen if certain decisions were made. Make the impact real to them.

Discuss Risk Comprehensively

Clients need to discuss more than portfolio risk with their advisors, especially if the advisor is focusing on the whole financial picture in lieu of merely managing investments.

Behavioral finance should play a role in helping clients understand personal risk. Take recency bias as an example—recency bias can make a client feel more or less risky, or risk averse, simply because of how their portfolio has performed over the past few months. Gauge a client’s risk temperature after a long-bull market and they’ll be more likely to believe that “stocks can only go up,” than if they recently endured losses in a bear market.

Most people understand that they view the world—and their wealth—through lenses shaded by bias, but few people understand what their own biases are or how they work. This is a role that advisors can help play.

Advisors can proactively become risk mitigators by using positive priming and framing to help nudge a client or prospect towards better behaviors.

Use Historical Examples

Risk can be illustrated by looking at historical markets. It’s especially effective to discuss market events that the client or prospect may have lived through.

But clients also need the current level of risk they’re taking to be clearly illustrated to them, and that’s why Orion believes that stress testing using the real client portfolio against past market events is key to bringing market risk closer to home.

Using broad indexes like the S&P 500, or illustrations of other asset classes, and how they performed during the global financial crisis of 2008, or the dot-com bubble and crash of the late 1990s and early 2000s, is not enough. The example should be personalized to illustrate the actual performance a client might expect if a market went through such scenarios.

Make Risk a Regular Conversation

Risk isn’t something to fear, as long as both advisor and client understand risk tolerance and the level of portfolio risk they are currently taking, according to Orion.

But too often, risk is a one-and-done conversation. The questionnaire is completed, an investment portfolio selected, and that’s the end of it. Or, it’s revisited during major market events, when the client is feeling stressed.

Risk cannot be a one-and-done conversation. While an advisor might understand a client’s stance towards risk at the beginning of their relationship, different situations and times within a person’s life may change how they feel about risk.

Risk should be a conversation that occurs whenever a client meeting occurs. That way, it’s not kept in the background until a big drawdown or a huge personal change—the advisor-client understanding of risk is allowed to evolve over time. When discussed frequently and repeatedly, risk eventually shifts from being a scary part of investing to a commonplace and normal element of a client’s financial experience.

[1] Orion Client Data 2019

[2] 2019 Modern Wealth Index Survey, Charles Schwab, 2019

[3] 2019 Modern Wealth Index Survey, Charles Schwab, 2019

[4] 2019 Modern Wealth Index Survey, Charles Schwab, 2019