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FPSU
®
Study Guide
Chapter 1: Financial Planning Process
To be used in conjunction with the money back guaranteed
Online FPSU
®
Exam Preparation Tools
available at
www.seewhylearning.com
SeeWhy Financial Learning
10
Factors that Affect a Client’s Risk Tolerance
Two factors that influence risk are “demography” and “stability of income”:
Demography
The following are simply generalizations, and while useful, they should never be used as
the basis of specific financial advice:
•
Men generally are more comfortable with risk than women.
•
People become more risk averse as they age.
•
People become less risk averse (more tolerant of risk) as they get wealthier or have
higher incomes.
•
Other demographic variables are marital status, occupation, etc.
Stability of Income
The stability of an individual's income can impact their risk tolerance! You may be able
or more willing to assume risk if you are reasonably certain that if your portfolio does fall
in value, you will still have income coming in to pay your bills!
Quattlebaum
developed a risk tolerance measure which is based on these three
components:
•
Risk 1:
The risk that current income will cease for six months or more
(employment stability).
•
Risk 2:
The risk that market value of the client’s net equity will go down more
than 10%.
•
Net equity in relation to consumption.
Risk level = (Net equity / Consumption) x (1/Risk 1) x (1/Risk 2)
Note: On the exam you are more likely to be asked what three components
Quattlebaum’s risk tolerance measure includes, rather than actually having to calculate
the risk level.