Risk is a fundamental part of financial advice. Advisers assess how much risk a client can afford to take, how much risk they are willing to accept and how that risk fits within their broader financial objectives.
But risk is not purely a numerical concept.
Two clients with similar incomes, assets and investment horizons can react very differently to exactly the same market event. One may see a 10% decline as a normal part of investing, while another may immediately question their entire financial plan.
Understanding this difference is an important part of effective financial advice.
Risk tolerance is more than a questionnaire
Risk tolerance questionnaires can provide a useful starting point. They can help advisers structure conversations and identify how a client might respond to different levels of investment risk.
However, a questionnaire cannot always capture the full psychological relationship a person has with money.
A client’s answers can be influenced by their current circumstances, recent experiences and expectations about the future. Someone may describe themselves as comfortable with investment risk when markets are performing well, but feel very differently after experiencing a significant loss.
This is why understanding the person behind the answers matters.
Our relationship with money starts early
Financial attitudes often develop long before someone becomes an investor.
A person’s upbringing can influence how they perceive saving, spending, debt and uncertainty. Someone who grew up in a financially secure household may have a different attitude towards investment risk from someone whose family experienced financial instability.
Neither perspective is necessarily right or wrong.
They simply reflect different experiences.
For advisers, understanding this background can provide valuable context when discussing investment decisions. A client’s financial behaviour may make much more sense when viewed through the experiences that shaped it.
Past crises can leave a lasting impression
Major financial events can have a powerful effect on how people perceive risk.
Clients who experienced significant losses during previous market downturns, financial crises or periods of economic uncertainty may become more cautious in the future. Even when their financial circumstances have changed, memories of previous losses can continue to influence their decisions.
This can create an important challenge for advisers.
A client may have the financial capacity to accept a certain level of risk but remain psychologically uncomfortable with it because of what they experienced in the past.
The adviser’s role is not to dismiss that concern. It is to understand it and help the client distinguish between a genuine change in their financial situation and an emotional response to a previous experience.
Personality also matters
People naturally differ in how they respond to uncertainty.
Some individuals are comfortable making decisions with incomplete information. Others prefer predictability and may feel uncomfortable when outcomes are uncertain.
These differences can influence investment behaviour.
A naturally cautious client may constantly focus on potential losses, while a more optimistic client may underestimate them. Both behaviours can create challenges if they lead to decisions that are inconsistent with the client’s long-term objectives.
This is where good financial advice goes beyond simply identifying a risk score.
It involves understanding how a client thinks, communicates and behaves when faced with uncertainty.
Family experiences can influence financial decisions
Risk perceptions can also be shaped by family circumstances.
A client supporting children, caring for elderly parents or preparing to transfer wealth to the next generation may have a very different attitude towards risk from someone with fewer financial responsibilities.
Family experiences can also influence investment priorities.
For some clients, protecting wealth for future generations may be more important than maximising returns. Others may prioritise achieving financial independence or maintaining a particular lifestyle.
These priorities can change over time, which means a client’s relationship with risk should not be treated as permanently fixed.
Capacity for risk and willingness to take risk are different
One of the most important distinctions advisers can make is between a client’s capacity for risk and their willingness to take risk.
Capacity relates to the financial consequences a client can realistically withstand.
For example, a client with substantial assets, stable income and a long investment horizon may have considerable capacity to tolerate temporary losses.
Willingness is different.
That same client may still feel highly uncomfortable seeing the value of their investments fall.
The opposite can also happen. A client may be willing to take significant investment risk but have limited financial capacity to absorb losses.
Understanding both dimensions helps advisers build strategies that are not only financially appropriate but also realistic for the individual client.
The adviser-client conversation matters
The most useful discussions about risk often happen outside the questionnaire.
Instead of asking only, “How much risk are you comfortable taking?”, advisers can explore questions such as:
- What would a significant market decline mean for you emotionally?
- Have you experienced a major financial loss before?
- What would make you feel uncomfortable about your investments?
- Which financial goals are you most concerned about protecting?
- Has your attitude towards money changed over time?
- What would you be most worried about losing?
These questions can reveal information that a standard risk assessment may not capture.
They also encourage clients to think more carefully about their own behaviour.
Risk should be revisited over time
A client’s relationship with risk can change.
A new job, marriage, divorce, inheritance, retirement, changes in family responsibilities or a major market event can all affect how someone thinks about uncertainty.
This makes regular reviews particularly important.
A financial plan should evolve as the client’s circumstances and priorities change – not simply because markets have moved, but because the person behind the plan may have changed as well.
The role of the adviser
Understanding risk is ultimately about understanding the client.
Technology can help advisers collect information, analyse portfolios and identify potential risks. Risk profiling tools can provide valuable structure. But these tools work best when combined with professional judgement and meaningful conversations.
The adviser can help clients recognise the difference between temporary discomfort and genuine financial risk, between fear and evidence, and between short-term market movements and long-term objectives.
This is particularly important during periods of market uncertainty, when emotions can become a powerful influence on financial decisions.
At Cornerstone, we believe effective financial advice should consider not only what a client owns, but also why they own it, what they are trying to achieve and how they are likely to respond when circumstances change.
Because every client has a different relationship with risk – and understanding that relationship is an essential part of delivering advice that is truly client-focused.
