Stability of Client’s Risk Tolerance in the Face of Financial Crisis

Updated on 18/06/2026

An article from LIA's The Advantage magazine by Paul Resnik and Stuart Erskine, Suitable Advice Institute 

Key Takeaways 

• Risk tolerance in financial planning is generally stable on average, even through major crisis periods - but some clients are more sensitive to economic shocks than others. 
• Client risk tolerance is only one part of a full risk profile and must be considered alongside risk capacity and risk required when giving suitable advice. 
• A risk tolerance assessment score change of more than 10 points (on a 0–100 scale) is treated as material because it can move a client into a different risk category. 
• The evidence reviewed suggests clients with lower starting financial risk tolerance are more likely to experience meaningful declines after major negative events. 
• Annual re-testing (and re-testing after material life changes) is presented as optimal, and during major economic events advisers may need to triage and communicate earlier with lower-risk clients. 

In our previous article (Risk Profiling, November 2022) we introduced the reasoning behind risk profiling, risk concepts including risk tolerance (the willingness to engage in a risky behaviour in which possible outcomes can be negative), risk capacity (an objective evaluation of an individual’s financial ability to withstand a financial loss) and risk required (the amount of risk an individual needs to take to reach a financial objective) and insights into human behaviour, in particular, bias. We detailed the steps to good practice regarding risk profiling and how to select a bona fide risk profiling tool. 

In this paper we are pleased to share with LIA cutting edge research and analysis regarding the stability of a client’s risk tolerance in the face of financial crisis. We highlight potential issues, and the processes advisers can put in place to help clients and avoid potential problems. 

The findings contained herewith are in part based on publicly available research which will be referenced, and risk tolerance test data, which for reasons of anonymity will be presented unattributed.  

As part of the research for this paper, the authors reviewed risk profiling data in light of the Global Financial Crisis (GFC) (2009) (sample size 2,408) (data provided by Finametrica) and The Pandemic 2020 (sample size 25,843) to better understand the impact of major events on the stability of risk tolerance. 

The conclusion is that these events have had an impact on risk tolerance scores. The evaluation has been carried out using test scores prior to the events and then re-testing the same clients post the events. 

Please note that the authors wish to highlight that the pandemic test data was collected early on in the pandemic before the current financial crisis had fully emerged. 

The authors conclude that the traditional working assumption underlying risk profiling is generally true; that is, risk tolerance remains stable on average even through financial crisis. However, for some clients, there is an impact to their risk tolerance score, in other words, a sensitivity to major financial crisis events. 

On a scale of 0-100 (with 0 being very low-risk tolerance and 100 being very high-risk tolerance and 50 being an average) a drop of more than ten points becomes material, moving the client into another risk category. 

Impact of Major Financial Crisis on Risk Tolerance Scores: 

The evidence emerging shows the impact for those affected by major financial crisis events is seemingly greater for many clients who start with a lower risk tolerance; major (negative) financial events appear to further reduce their level of risk tolerance.  

Although further research is required to understand the dynamics in more detail, the authors put forward a theory that personality type plays an important part in determining how sensitive and reactive clients are to (news of) financial crisis. Anecdotally, many advisers will be able to bring to mind clients who are perhaps worriers, of a nervous disposition. In more technical psychological terms these clients will be demonstrating they have a dominant “Neuroticism” personality trait (The Big Five Personality Traits)[1] which the authors posit may mean they have a greater sensitivity to news of financial crisis; resulting in further reducing their level of risk tolerance in the face of bad news of financial crisis. 

The evidence suggests that at the lower end of the risk tolerance spectrum, around 2% of clients experience a meaningful drop in risk tolerance score post a crisis. This drop would put those clients into a new lower risk category; to a point whereby their original portfolio may no longer be appropriate for their new stated level of risk.  

More broadly, at the lower end of the risk spectrum, 15% of people experience a drop in risk tolerance score but not necessarily to the point whereby their portfolio requires adjustments; but communication may be required with the client to allay potential fear.  

Even if there is a material change to the risk tolerance score this does not mean that the client's portfolio will need to be adapted to reflect this change. Remember, risk tolerance is only one factor. As advisers are aware, other important factors come into play when giving suitable advice; risk capacity, risk required to meet objectives, time frame and other personal circumstances. Adviser communication with clients to re-assess advice and assure clients will help to navigate the fear some may be experiencing. 

The authors’ findings are consistent with published papers: “Statistically, post-GFC risk tolerance scores are lower than their pre-GFC counterparts. However, the magnitude of this difference is economically small. When changes in financial risk tolerance are modelled, there is evidence of stability across the overall sample, with the mean individual change in tolerance quite small and not statistically significant. We confirm in the analysis of this change that the impact of the GFC on risk tolerance is small. However, there is some evidence that the drop in scores in absolute terms is larger in both tails of the distribution, implying larger relative drops for those with lower risk profiles.” [2][3] 

Remember, risk tolerance is a personality trait. Baumeister and Tice (1988) define a person as “Traited” when they exhibit stability in a personality trait. It is well established, in psychology literature, that some individuals are more “traited” than others in consistently expressing or demonstrating that trait (Bem and Allen 1974)[4]. Individuals who are weakly “Traited”, tend be less predictable in their behaviour (LaHuis et al. 2017). [5] 

Therefore, based on data available to the authors, their experience, and published papers, the authors conclude that the optimal frequency for re-testing a client’s risk tolerance to capture any potential changes is at the annual review. This is in addition to re-testing at any material change in the clients' personal circumstances.  

It is the authors’ conclusion that re-testing annually is particularly important for clients at the lower risk tolerance end of the spectrum. 

Indeed, segmenting clients by risk level may be useful to improve client outcomes when communicating in both terms of speed and approach. This furthers the authors’ opinion that at the heart of the issue is the client’s personality type. Clear communication with the client is likely to be key to stable client outcomes and preventing client behaviours that in essence may be self-harming and litigious towards adviser firms. 

This is consistent with FinaMetrica Global Financial Crisis (GFC) Survey Report: “Major life events have been known to cause permanent psychological change. For some clients the (GFC) crisis might have been a catastrophic life event and their scores might have decreased dramatically, bringing the average down.” Geoff Davey October 2009.[6]  

Major life events that materially impact (reduce) a client’s level of risk tolerance may be client specific too, for example as a consequence of health changes; divorce; marriage; wealth level; retirement; children; changing financial priorities and objectives. 

The authors recognise this is complex area, so we have put forward a clear recommended approach in light of the findings: 

Recommended Risk Tolerance Test Frequency Approach: 

A NEW Risk Profile test should be undertaken at: 

• Client Onboarding Stage: The adviser should undertake a full risk tolerance test as part of “know your client”. At this stage it is worth segmenting the clients to index those who have lower risk tolerance. 
• Annual Review: At each annual review the adviser needs to explore the client’s risk tolerance level and document it. Clients who have previously shown to have a lower risk tolerance level should be re-tested at the annual review. Many providers offer a short-form risk tolerance test which although not as accurate as their full test should be sufficient to highlight any changes in risk tolerance level. 
• Changing Client Circumstances: If client circumstances have materially changed e.g. as a consequence of health; divorce; marriage; wealth level; retirement; children; financial priorities and objectives - then a risk tolerance test should be completed. 
• During Major Economic Events: Given that some clients may be more sensitive to news about negative economic events, advisers should consider triaging clients according to risk tolerance level, identifying clients at the lower risk tolerance end of the spectrum and contacting them in the event of bad news to re-explore and document their risk tolerance level. Good communication and connection are at the heart of the financial advisers’ relationship with their clients, so early contact to re-appraise and re-communicate their client’s financial plan will be important. 

The Authors’ Backgrounds: 

Paul Resnik 

Paul is an innovator in financial services which includes founding investment platforms and fund supermarkets, cash-flow modelling technology, and global risk profiling technology: FinaMetrica. For over 30 years Paul has been at the forefront of improving the advice process for both clients and advisers. Paul’s contribution to developing suitable advice particularly in assessing risk is probably unparalleled. Paul is Chief Ethics Officer of the Suitable Advice Institute. 

Stuart Erskine 

Stuart has an academic background with a master’s degree in Economics, specialising in Behavioural Economics. He is the co-author of a number of papers with Paul Resnik in the area of financial risk and risk profiling. Stuart also co-authored the technical manual for FinaMetrica for a number of years which included extensive evaluation of the millionplus tests completed in many countries since 1998, including India. He has developed a number of risk profiling tools and helped adviser firms improve the accuracy of their risk profiling process. Stuart is Director of Research and Strategy with the Suitable Advice Institute.  

Understanding Client Risk Tolerance: What It Measures (and What It Doesn’t) 

Risk profiling works best when it is understood as a structured way to assess client risk tolerance - and how consistently that tolerance holds up when markets and life circumstances change, rather than as a single score that “decides” an investment approach. In practice, a robust profile brings together several separate risk concepts to ensure the client’s stated willingness to take risk is interpreted in the right context. 

Client risk tolerance vs risk capacity vs risk required 

Client risk tolerance is a personality-linked willingness to accept uncertain outcomes and the possibility of loss. Risk capacity is the objective financial ability to withstand loss. Risk required is the amount of risk needed to reach a stated goal. In risk tolerance in financial planning, these three inputs can point in different directions - so advisers need to document how the client’s risk tolerance is balanced against what they can afford to lose and what they need to achieve. 

Why is a client risk tolerance assessment not a portfolio instruction? 

A client risk tolerance assessment is an important input, but it is not a standalone recommendation. Even where a client’s financial risk tolerance score shifts, a portfolio decision still depends on the client’s objectives, time frame and personal circumstances, as well as whether the change is large enough to be considered material. 

What a “material” change in client risk tolerance means in practice 

The article frames materiality as a score movement of more than 10 points on a 0–100 scale, because it can move a client into a different risk category. This is the point at which advisers are more likely to need deeper discussion, clearer documentation, and closer attention to the client’s risk tolerance—particularly for clients who begin at the lower end of the client risk tolerance spectrum. 

What a “material” change in client risk tolerance means in practice 

The article frames materiality as a score movement of more than 10 points on a 0–100 scale, because it can move a client into a different risk category. This is the point at which advisers are more likely to need deeper discussion, clearer documentation, and closer attention to the client’s risk tolerance, particularly for clients who begin at the lower end of the client risk tolerance spectrum. 

Why Risk Tolerance Can Shift During Crises: A Behavioural Lens 

Crisis events can trigger sensitivity—especially at the lower end 

The evidence presented suggests the impact of major crises is seemingly greater for clients who start with lower risk tolerance. Major negative events can further reduce willingness to take risk, which can show up in re-testing even when broader averages remain stable. 

Personality traits and “traited” behaviour 

The article highlights the idea that some people are more “traited” than others, meaning they express a personality trait more consistently over time. Clients with a dominant “Neuroticism” trait may be more sensitive to negative economic news, which may contribute to a drop in their risk tolerance score during crisis conditions. 

The role of communication before problems escalate 

Not every score change requires a portfolio change. However, a shift in stated tolerance can still signal fear, stress or uncertainty—especially during major economic events. Clear, timely communication and documented re-exploration of the client’s position can help maintain stable outcomes and reduce the risk of reactive, self-harming decisions. 

Conclusion 

The research discussed supports a practical conclusion: risk tolerance remains stable on average, even during major financial crises, but stability is not uniform across all clients. A minority, particularly those starting with lower client risk tolerance, can experience meaningful drops, sometimes large enough to shift risk category. This is why risk tolerance assessment should be treated as one important input within a wider risk profiling process, interpreted alongside risk capacity, risk required, time frame and personal circumstances. Ultimately, the most resilient outcomes come from combining sound measurement with clear documentation, segmentation, and communication, especially when economic news is at its most unsettling. 

This article first appeared in February 2023  - Vol 3 Issue 1 - in The Advantage magazine, one of the many benefits exclusively available to LIA members.