The Influence of Financial Risk Tolerance on Investment Decision-Making in a Financial Advice Context

Abstract

Client risk tolerance is universally assessed in the advisory process to help financial advisers provide suitable advice that assists clients in their investment decision-making. Although there is a well-established literature on risk tolerance and decision-making, little is known about financial risk tolerance and its influence on investor decisions in the financial advice context. Thus, the purpose of this study is to examine this influence with a focus on the key expected risk tolerance determinants: client financial literacy, trust in the financial advice service, and relationship length with the service. A new theoretical model and related hypotheses were proposed and tested using survey data from financial adviser clients in Australia (N=538). Results revealed a positive relationship between client risk tolerance and investment decision-making. Further, client trust and relationship length with the service were found to be positively associated with client financial literacy and risk tolerance. These findings, which provide a more comprehensive understanding of how risk tolerance and its antecedents influence client decisions, have the potential to improve advice in the financial services industry. KeywordsRisk tolerance, individual investment decisions, client-adviser relationship, financial advice context, financial planning AbstractClient risk tolerance is universally assessed in the advisory process to help financial advisers provide suitable advice that assists clients in their investment decision-making. Although there is a well-established literature on risk tolerance and decision-making, little is known about financial risk tolerance and its influence on investor decisions in the financial advice context. Thus, the purpose of this study is to examine this influence with a focus on the key expected risk tolerance determinants: client financial literacy, trust in the financial advice service, and relationship length with the service. A new theoretical model and related hypotheses were proposed and tested using survey data from financial adviser clients in Australia (N=538). Results revealed a positive relationship between client risk tolerance and investment decisionmaking. Further, client trust and relationship length with the service were found to be positively associated with client financial literacy and risk tolerance. These findings, which provide a more comprehensive understanding of how risk tolerance and its antecedents influence client decisions, have the potential to improve advice in the financial services industry. JEL Classification: D14

Financial Risk Tolerance: The Case of Older Chinese in Klang Valley, Malaysia 2020

“…Previous research is consistent in concluding that individuals with better financial understanding, experience, and knowledge will lead them to have a higher risk tolerance than others. Similar results are tracked in Christina (2019), Fernandes et al (2014), Loke (2015), Nguyen et al (2016), Samsuri et al (2019) and Wisudanto and Zidni (2016) found that improving the understanding of the financial product is a critical component to make the correct and right option in regard to financial decision making. In general, better educated men were found to have higher financial risk tolerance from a study in Pakistan .…”

“…For those older Malaysians retire with insufficient savings, it may motivate them to take higher risk and seek for investment with higher returns. As a result, financial risk tolerance has been a prominent study in issues related to financial management, investment and investor's investment decisions (Nguyen et al, 2016;Chng & Hafinaz, 2019;Kanagasabai & Aggarwal, 2020). Many studies have cited and defined financial risk tolerance as the maximum degree of uncertainty of an individual's willingness to accept risk or uncertainties when he or she is making a decision (Roszkowski & Grable, 2010;Nobre et al, 2018).…”

“…Many studies have cited and defined financial risk tolerance as the maximum degree of uncertainty of an individual's willingness to accept risk or uncertainties when he or she is making a decision (Roszkowski & Grable, 2010;Nobre et al, 2018). For example, risk-taking investors tend to consider more risky investments, thus indicating a relationship between financial risk tolerance and investment decisions (Nguyen et al, 2016;Kanagasabai & Aggarwal, 2020). Previous studies can further support the influence of financial risk tolerance towards decision-making as it has been widely studied over the years (Shtudiner, 2018;Chng & Hafinaz, 2019;Aeknarajindawat, 2020).…”

Financial Literacy and Financial Risk Tolerance of Individual Investors: Multinomial Logistic Regression Approach

“…However, the effect of financial literacy on risk tolerance has been researched in a relatively smaller number of studies. In these studies, it was generally identified that there was a positive relationship between financial literacy/ financial education level and financial risk tolerance (e.g., Bajo et al, 2015;Bayrakdaroğlu & Kuyu, 2018;Grable, 2000;Grable & Joo, 1999Masters, 1989;Nguyen et al, 2016;Wang, 2009). Masters (1989) analyzed the risk tolerance and investment knowledge for a sample of 480 investors in a Midwestern investment firm through covariance analysis and established that those with knowledge about investment had higher risk-taking tendencies than those with no or less knowledge about investment.…”

Editorial

“…This issue of AABFJ begins with Nguyen, Gallery and Newton (2016) as they examine the influence of risk tolerance on investment decision making. They also discuss a new theoretical model more determining risk tolerance in financial planning clients and report on their results when testing this model in an Australian context.…”