Wealthfront designed its service to ask the minimum number of questions to accurately determine an individual’s risk tolerance. Our final list of questions was developed after a comprehensive survey of the academic research on the topic.
Some online free risk assessment questionnaires only look at subjective willingness to take risk. Wealthfront’s multi-tiered approach to assessing risk evaluates:
- An individual’s subjective willingness to take risk
- An individual’s consistency in response to subjective risk assessment questions
- An individual’s objective ability to take risk based on her projected retirement income compared to her projected retirement spending needs
We ask subjective risk questions to both determine the level of risk an individual is willing to take and the consistency among her answers. For example, if an individual is willing to take a lot of risk in one case and very little in another, then she is inconsistent and is therefore assigned a lower risk tolerance score than the simple weighted average of her answers.
We ask objective questions in order to estimate with as few questions as possible whether the individual is likely to have enough money saved at retirement to afford her likely spending needs. The greater the excess income, the more risk the client is able to take.
We believe that our focused, short list of questions is far more effective in identifying an individual’s true risk tolerance than some longer lists of questions that we have seen other financial advisors use.
Learn more about why your risk tolerance matters.
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