Risk tolerance is a key concept all investors should understand, though it may not be in the forefront of your affluent client’s minds. How much  uncertainty they are able to tolerate in their portfolios may often determine their returns. What kinds of vehicles do they favor; are they a safe “widow and orphan stock” investor or do they border on venture capitalist? Do your clients like domestic or foreign investments? Stocks or bonds? Equities or commodities? Hedge funds? How does the risk tolerance of your affluent clients measure up against other segments of the affluent population? 

Spectrem research reports that while almost all affluent households say that their success is due to hard work, 65% say they gained their affluence through taking risks and a robust 80% of the most wealthy (those who are worth over $25 million) report that it was taking risks that earned them their success. There are certain groups within the affluent who report more or less risk tolerance than others. For example, affluent women are much less risk tolerant than affluent men. When asked to agree or disagree with the statement, “I set aside a portion of my assets for more speculative or higher risk investments”, 71% of affluent men agreed while only 52% of women.One group that is not very risk tolerant is affluent professionals. Only 45% of affluent professionals (physicians, attorneys, accountants and dentists) say that their main source of wealth is from taking risks which makes sense considering their affluence is mostly due to their education and specialized areas of expertise, not necessarily their financial acumen or family inheritance. But considering that once they have established their affluence, they continue to avoid much risk in their portfolios perhaps speaks to the nature of the professional. While 70% of affluent investors report setting aside a portion of their income for    riskier investments, only 55% of affluent professionals do the same.

Risk tolerance shows itself through investing behavior and vehicles and products chosen. For some groups, one product appeals much more than other for reason of risk as in different religious segments of the affluent population. Indeed, there is a surprising amount of variance in risk tolerance among different religious groups. Spectrem’s Perspective UHNW Financial Decision Differences Amount  Religious Segments found that when it comes to investing, Catholic investors are more risk tolerant than Protestant or Jewish investors, and Jewish investors are the least risk tolerant. Jewish investors are five times as likely as Catholic investors, and ten times as likely as Protestant investors to feel that stock ownership bears little risk. It is shown that Jewish investors are the least likely to consider hedge fund and venture capital  investments as risky.

Despite differences among the affluent population in risk tolerance, all segments have some amount of lenience that should allow for a balanced portfolio of risk and safety that meets the comfort level of both you as the  advisor and your client.

---