Financial Planning Case Study

Financial advisors face serious difficulties in order to assess and evaluate good strategies to help clients make investment decisions which entail risk. All financial planners would agree that their role is to help the client choose a product or portfolio that is suitable for them according to their risk profile.

Financial planners use the following concepts to define clients risk profile; Risk Tolerance, Risk aversion, Risk Capacity, Risk need, Risk preference. (PLEASE DEFINE EACH CONCEPT OR TERM)

Risk tolerance relates by how psychologically an individual reacts to decisions involving risk. The risk exists when there is no certain guaranteed outcome. Although the uncertain outcome may be favorable or unfavorable, however, the uncertainty

The importance of Risk Tolerance assessment in financial planning comes from the fact that it provides the financial planners and their clients with a feel on what would make the right investment or protection decisions that fit them well according to their age, level of income, gender, number of independent, marital status, etc. The problem is the difficulty that the financial planner may face when they attempt to measure their clients risk tolerance practically and the misunderstanding ( don’t understand what you mean with misunderstanding??.

( (Dalton & Dalton, 2004) defined the risk tolerance as the willingness of the clients to accept risk in their portfolio investment. Also gave two ways to estimate client’s risk tolerance; the first one is to understand the Clinet’s history with investments .The second is to use a questionnaire which is designed to assess client’s risk tolerance. The combination of these two methods can provide a guideline for a planner to assess client’s risk tolerance. ) not sure if I would keep this paragraph

4) Education: The educational level may result in an increase in the risk tolerance., i.e individuals with higher levels of education have higher risk tolerances.

5) Income and wealth: The income plays a significant role in the ability to take more risks, in general, families with higher incomes can tolerate more risk than families with limited resources. (Guillemette, Finke and Gilliam 2012) examined risk tolerance questions in a different way based on three theories: economic theory, prospect theory and the client self-assessment questions based on risk tolerance theory which in)cludes two theories, the conventional economic theory which is the willingness to accept a variation in outcomes, and prospects theory ( what is the difference f the two theories

The purpose of their study was to provide the financial planner with a better understanding of how to predict the client’s response toward the market fluctuations and uncertainty in order to provide them with the most accurate recommendation to help them achieve their goals. The methodology of