Knowledge is power, especially when it comes to understanding your personal and investment risk profile. It is one of the major stepping stones that can help your employees make better financial decisions and set realistic expectations when in the minefield of the investing world.
The vast majority of people aren’t aware of their risk profile and what it means – and that’s where our employee financial wellness programs come in.
We utilize our industry knowledge alongside leading financial planning software to determine each individual's personal and investment risk profile.Determine my Employees’ Risk Profiles
A risk profile is a measure of an investor's willingness to take a risk on an investment without the guarantee of a return.
Each individual has a unique risk profile since risk-taking is influenced by psychological factors, loss tolerance capacity, investor age, income, and costs, among many other factors.
Knowing their risk profile will help your employees determine if a particular investment is right for them at this point in their life.
So, what does a risk profile include? These are the three main components that make up a risk profile:
It comes down to an individual’s willingness and ability to withstand losses within their portfolio. When investors have a high-risk tolerance, they'll be more likely to put money into risky investments with potentially higher returns; when investors have a low-risk tolerance, they'll rely on lower-risk investments that don't involve as much financial exposure but offer smaller rewards.
Risk capacity refers to the amount of risk an investor can "afford" to take, and is determined by a person's existing net worth in comparison to their expenses, investment objectives, and time horizon for investments.
Risk requirement is about the financial reasons for taking risks so that a financial goal can be reached with a higher comfort level of certainty. For example, an investor who might not have enough income to maintain their regular cash flow in retirement may need to take some risks to achieve their goal.
As an employer, helping your employees determine their personal risk profile is a good way to ensure that they are making informed decisions on how to invest their money in a way that matches their financial goals.
To determine where your employee is on the risk spectrum, we use a comprehensive questionnaire that considers their personal circumstances and important information, such as age and income, as well as any other factors relevant to their situation.
The employee’s answers are analyzed by our software system to determine an employee’s individualized personal risk profile. Once completed, the questionnaire results are presented in each employee’s online dashboard and are summarized to give an overall investment style for each employee.
With this valuable information in hand, your employees will be equipped and prepared when it comes to knowing what type of investments they should be choosing and what kind of return they can expect.
To determine an investment risk profile, we will perform an investment risk analysis of the employee’s investments, such as 401(k) holdings and all other investment accounts, including liquid domestic holdings such as:
U.S. Traded Stocks
(Those that are most often listed on the NYSE, Nasdaq, and AMEX.) U.S. stocks are very common among investors and tend to be very liquid investments. Stocks can be a great way for investors to create long-term wealth but do expose investors to the risk of substantial losses as well.
A mutual fund lets you spread your money out over many different stocks and other types of securities. It also lets you diversify your money out over many different sectors, styles, etc. Mutual funds can also buy bonds, cash, or commodities like gold and other precious metals. This makes it possible for investors to lower their risk by not owning just one stock or sector. It positions them to receive better returns than they would get from only holding a single investment or sector of the market.
ETFs are traded on an exchange, like stocks and bonds, which means they can be bought and sold throughout the day. An employee may want to start with low-cost investments, so he/she might invest in an index fund or ETF that tracks one of many stock market indexes.