Submission Date

7-22-2016

Document Type

Paper- Restricted to Campus Access

Department

Business & Economics

Faculty Mentor

Andrew Economopoulos

Comments

Presented during the 18th Annual Summer Fellows Symposium, July 22, 2016 at Ursinus College.

Project Description

In finance, it is said that risk and return are the two biggest factors when considering the optimal portfolio for a client. Theoretically, the ideal portfolio yields the highest return given a level of risk—a level of risk the investor can tolerate. However, attitudes towards risk vary from client to client, so how does a financial planner identify the ideal portfolio for an investor’s specific level of risk tolerance? Thus risk profiling is a crucial element in servicing the client. With this study, I assess whether the industry’s practices in regards to risk profiling are adequate and evaluate how regulation plays a role. While regulation regarding risk profiles has been recently updated, many firms have developed questionnaires to capture an investor’s risk profile. However, research on risk profiling questionnaires suggests that their measurement of an investor’s risk tolerance is imperfect. Therefore, financial planners, to better serve their customers, should supplement these questionnaires with personal conversations with clients to fully address financial alternatives and risks. Ultimately, risk profiling appears to still be developing within the financial services industry.

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