Investors' perception of risk, rather than risk tolerance itself is what is affected by volatile market conditions, according to research published by FinaMetrica.
Investors’ perception of risk, rather than risk tolerance itself is what is affected by volatile market conditions, according to research published by FinaMetrica.
The research findings contradict the belief tolerance is affected, and helps explain misconceptions in attitudes towards risk tolerance assessment, said Geoff Davey, co-founder of FinaMetrica.
He added that the findings were particularly important in mind of suitability tests that financial intermediaries will be subject to under the UK’s Retail Distribution Review rules.
Davey said: “This is good news for advisers. If the client’s risk tolerance collapsed in a bear market there would be little the adviser could do to prevent a panicked sale. However, if increased risk perception is the likely Achilles heel, then the advisor can influence the client’s risk perception through education about market risk.”
To read the full report click here: On the stability of risk tolerance