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The danger of risk tolerance questionnaires

Not only are risk tolerance questionnaires useless, but they represent a significant danger when it comes to fiduciary liability.

By Chris Carosa | Updated on August 15, 2013
<a href="http://www.freedigitalphotos.net">Photo credit: FreeDigitalPhotos.net</a>

So I’m sitting with a corporate exec the other day going over her 401(k). She’s a middle-aged woman who definitely knows her stuff when it comes to finance and investments. She gives me all the usual data – you know, currently salary, current retirement savings value, annual contribution, expected Social Security, retirement date. I put it in the spreadsheet blender and – presto! – out comes the rate of return she needs from now until her last day of work in order to retire in comfort. I call this her “Goal-Oriented Target” and it is quite achievable – somewhere between 4 to 5 percent. 

I’m about to move on to the next step when, out of the blue, the CEO of the company ambles by. He’s what some might call a “ragged veteran” of sorts. He’s seen a million-and-one investment advisors, hopping from one to another whenever the underperformance bug hit. No doubt familiar with all the tools of the advisor trade, he confidently asks the woman, “This is all fine and good, but how does this relate to your risk tolerance?” She politely smiles a respectful smile and says nothing. 

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