Important New Research on Client Profiling

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Client profiling is an area that is ignored by most financial planners. New research by

Professor Shachar Kariv of University of California, Berkeley demonstrates why this is a mistake.

A Three-Dimensional Challenge

As a planner, your job is to understand and balance the three dimensions that are common to every client: their goals, constraints and preferences. To do this at a high level you need to explore each area separately and document your findings.

A skilled planner can guide clients through an exploration of their hopes and dreams for the future. But clients often do not have sufficient resources to meet all their goals. Understanding the relative priority of goals allows you to provide better advice when trade-offs are necessary.

Step two is understanding the constraints that affect your clients’ ability to reach their goals. Time and current financial assets are the most common. Most planners are pretty good at collecting the facts about a client’s time horizon and financial constraints.

The area where many planners struggle is understanding a client’s preferences. “Preferences,” in this context, is an umbrella term that includes emotional and cognitive characteristics that affect how the client perceives the world and makes decisions. Capturing your clients’ preferences requires creation of a “behavioral portrait.”

How to Develop a Behavioral Portrait for Each Client

The industry has traditionally used risk tolerance questionnaires to fill this need. But Kariv’s research has shown that these questionnaires have a number of inadequacies.

First, stated preferences regarding risk tolerance are not particularly reliable. Clients are bad at understanding and reporting their own risk tolerance.

Second, risk tolerance changes over time. It is a dynamic, not a static characteristic.

Another problem with traditional risk tolerance questionnaires is they focus on only one aspect of a client’s risk persona. There are actually four distinct aspects of every client’s risk persona.

The first is risk requirement. That is the amount of risk that should be taken to reach their stated goals. It is essentially a math problem.

The second is risk capacity. That is the amount of risk a client can afford to take given their current constraints of time and financial resources.

The third is risk tolerance. Kariv’s research suggests that risk tolerance actually has multiple components. They include risk aversion, loss aversion and ambiguity aversion.

Risk aversion relates to a client’s willingness to assume risk.

Loss aversion relates to how a client weighs the potential for gains and losses and the way they react to losses once they occur.

Ambiguity aversion relates to how comfortable a person is making decisions in an environment of uncertainty.

To appropriately tailor the advice we give clients, we should understand the multiple components of their risk tolerance. They are all measurable.

The fourth aspect of a client’s risk persona is risk perception. This refers to a person’s attitudes about the likelihood of bad events occurring. Knowing where your clients stand on the optimist/pessimist scale can help you better counsel them before and after bad events.

An Opportunity to Stand Apart

Kariv’s research shows that we still have a long way to go in understanding our clients and being able to appropriately advise them based on their unique goals, constraints and behavioral characteristics. You can learn more about his research and some of the tools he and his colleagues have developed to address this problem at (click on “The Science” tab) or from his recent First Ascent Master Class webinar at:


Scott MacKillop is CEO of First Ascent Asset Management, a registered investment adviser based in Denver that provides outsourced investment management services to financial advisers and their clients. He is a 40-year industry veteran and can be reached at





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