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User Manual & Methodology Guide
The Risk Assessment Questions
The Risk Assessment Questions

Breakdown of each of the risk assessment questions

Updated over a week ago

TIFIN Wealth's Risk Alignment assessment is composed of 16 questions:

  • 13 questions designed to assess Risk Capacity

  • 3 questions designed to assess Risk Preference.

Note: Advanced AI and machine learning algorithms enable the assessment to ask fewer questions yet produce a more accurate risk score.

The assessment places more weight on factual data (versus subjective data/feelings) by considering:

  • Financial Data - Annual Income, Investable Assets, Annual Expenses

  • Time-Based Data - Age, Investment Time Horizon

  • Household Data - Household Size, Zip Code Based Cost of Living

  • Human Capital Data - Household Health Risk, Consistency of Earnings, Stability of Employment Industry

By focusing on factual data, the risk assessment generates a Risk Capacity score, which is one’s ability to take on risk given their income, investible assets, expenses, age, job type, job industry, etc. We consider three types of Risk Capacity:

  1. Base Risk Capacity is a function of time, whether it be age, time to retirement, or an investment time horizon.

  2. Human Capital Risk Capacity focuses on an individual’s earnings consistency, geography, and the industry in which they work. Human Capital Risk Capacity is a function of where you live, where you work, and the kind of work you do.

  3. Financial Risk Capacity accounts for assets, liabilities, income, expenses, and anything that impacts these factors.

Breakdown of Each Question

Question 1 - Age

Age establishes the base Risk Capacity. The younger generation can withstand modest losses given their relatively small available investable assets, offset by a longer time horizon to the average retirement age.

  • In your working years, there is greater financial security and the ability to weather down markets.

  • Logically, retirees have less ability to take on risk during this life stage and must begin taking distributions for tax advantages accounts in their 70’s (RMDs).

After determining one’s age and time horizon, TIFIN calculates the base risk capacity which changes over time as one approaches retirement age and beyond.

Question 2 - Income

  • This question is asking for the total gross income of your family. If you are not married, your household income is likely just your annual salary.

  • Income levels are direct inputs into an individual’s ability to take on Risk.

Question 3 - Zip Code

  • Zip code helps determine cost of living in a particular area. Cost of living, real estate prices, and the major sectors and industries where you live can impact your ability to take on risk.

  • When the client owns their home, the residential Zip Code helps to determine if the value of their home (i.e., their Risk Capacity) is more vulnerable or less vulnerable to economic downturns because of the dominant Industry in the area.

Questions 4 & 5 - Household Dependents & Ages

  • Dependents would incline children or anyone living with you full-time other than the two heads of the household.

  • More dependents may reduce one's ability to take on risk, thus reducing Risk Capacity.

Question 6 – Investible Assets

  • Total investible assets represent the money that can easily be invested and/or converted to cash quickly (i.e. stocks, bonds, mutual funds, etc). Portfolio size is a key factor for your Risk.

  • The only time investable assets will affect risk capacity is if the client’s investment amount is larger than their total net worth. This would mean the individual will need to borrow in order to invest, thus drastically reducing their Risk Capacity. This would generally result in a Risk Capacity score of 1.

Question 7 – Investment Time Horizon

  • Generally, a longer time horizon would result in a greater Base Risk Capacity.

  • The exception is younger investors, who tend to have lower Income and Net Worth.

  • Time Horizon is directly correlated to Age so please refer to question 1 for more details.

Question 8 – Expenses

  • When Expenses exceed one’s Total Net Worth + Income, Risk Capacity is reduced.

  • When Expenses are less than one’s Total Net Worth + Income, Risk Capacity does not change.

Question 9 – Total Net Worth

  • Assets - Liabilities = Total Net Worth

  • Assets (what you own) would include Real Estate, Checking Accounts, Investment Accounts, and Retirement Savings. Liabilities (what you owe) would include mortgage, credit cards, personal loans, student loans, etc.

  • When combined with Income, Net Worth may provide a cash reserve to cover Expenses.

  • When the ratio of Net Worth to Expenses is sufficiently high, Risk Capacity also Increases.

Question 10 – Maximum Downside Loss

  • This question is gauging how much loss an investor is willing to take while staying invested in the market during a downturn.

  • When evaluating how much risk an individual is willing to take on, the primary driver is understanding market drawdowns and time to recover during periods of market volatility and uncertainty.

  • This question serves as the primary driver of the Preference score. If an individual selects -25% as the maximum amount they would be willing to lose, their Preference score will be close to 25 (factoring in age and comfortability around sure gain/loss).

Questions 11 & 12 – Investment Gain / Loss Preferences

  • When clients prefer sure outcomes, there would decrease their Risk Preference.

  • When clients are more comfortable with uncertainty, there would increase their Risk Preference.

Question 13 – Household Health

  • Health issues for head(s) of household can impact future income and meaningfully reduce the family’s ability to take on investment risk.

Question 14 – Income Consistency

  • Consistent earnings result in higher Risk Capacity.

  • If earnings are more volatile/less consistent, this would result in lower Risk Capacity.

Question 15 – Industry of Work

  • Working in a sector that's relatively Recession Proof may increases Risk Capacity.

  • Working in a sector that's less resilient to a recession/downturn may decrease Risk Capacity.

Question 16 – Home Ownership

  • Owning a home in an area whose economy is dominated by a Recession Proof industry increases Risk Capacity since Real Estate prices are more stable.

  • Conversely, owning a home in an area dominated by a more vulnerable industry reduces Risk Capacity

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