Risk profiling is supposed to match an investor’s portfolio with both their ability and willingness to take risk. But “willingness” isn’t stable. It shifts with markets, headlines, and emotional reactions. Even the wording of a single survey question can change a client’s response before a market event ever occurs.
That’s why advisors can’t stop at assessing risk preferences. To make risk profiling useful, they must also recognize and coach clients through the emotional biases that distort those preferences.
I first encountered the critical distinction between risk tolerance and risk attitudes in Michael Pompian’s Behavioral Finance and Wealth Management. His explanation, that true risk tolerance is a stable, personality-based trait, while risk attitudes are volatile and emotionally driven, was both revelatory and practical.
Yet it was only years later, after training in coaching, that I fully understood how emotional bias can be addressed, and how language can reshape what a client perceives as their “willingness” to take risk.
Understanding the Trio: Risk Capacity, Tolerance, and Attitudes
Most advisory frameworks adjust portfolio recommendations when there’s a mismatch between risk capacity (what the investor can afford to lose) and risk tolerance (what they’re emotionally comfortable withstanding).
And here’s where it gets nuanced. There is a distinction between risk tolerance and behavioural risk attitudes. Both combine to determine risk appetite and yet there are essential differences:
- Risk Tolerance: A client’s stable preference for risk. It reflects the client’s enduring preferences about risk, often grounded in experience, values, and life stage.
- Behavioral Risk Attitudes: Unstable and highly context-dependent. They reflect short-term reactions to volatility, recent losses, or market headlines. While real, they are often poor guides for long-term decisions.
When risk appetite falls short of risk capacity, the advisor’s job is not merely to reduce exposure. It’s to understand and address the emotional triggers that might be contributing to that low risk appetite. Allowing these unstable attitudes to dictate portfolio design risks producing an emotionally “comfortable” solution today that fails the client in the long run.
Coaching Clients Through Common Emotional Biases
Advisors often see the same emotional patterns play out when markets shift. Here are some of the most common biases and ways to reframe the conversation so clients can stay grounded in their long-term strategy.
Loss Aversion
Clients often say: “I can’t afford to lose anything right now,” or “I should pull my money out until things calm down.”
A more helpful frame: The real risk isn’t just losing money, it’s missing the growth that secures future goals. The question becomes, “Are you trying to avoid short-term discomfort, or are you aiming for long-term financial security?”
Overconfidence
Clients may say: “I’ve got a good feeling about this sector.”
A more helpful frame: A strong instinct deserves a strong process. Even good calls benefit from strategy. The question is, “What would this decision look like if we stripped out the emotion and focused only on the data?”
Self-Control Bias
Clients may say: “I know I should invest more, but I just haven’t gotten around to it.”
A more helpful frame: “You clearly care about your financial future. How does delaying investing align with that priority?”
Status Quo Bias
Clients may say: “Let’s leave things as they are for now.”
A more helpful frame: Sometimes standing still is the riskiest move. Ask, “What happens if nothing changes? What opportunities are lost by waiting?”
Endowment Bias
Clients may say: “I’ve had this stock for years, it’s been good to me.”
A more helpful frame: “If you didn’t already own it, would you buy it today?” Explain that honoring past success might mean taking profits and reinvesting wisely, rather than holding on out of habit.
Regret Aversion
Clients may say: “What if I invest and the market drops tomorrow? I don’t want to make a mistake I’ll regret.”
A more helpful frame: Diversification helps protect capital while still moving forward. “Think of it this way: refusing to plant seeds because it might not rain tomorrow means missing an entire growing season.”
Conclusion
Advisors today must do more than understand markets; they must help clients navigate their own internal markets. That means spotting biases such as:
- Loss aversion: reframing fear of short-term loss into focus on long-term growth.
- Self-control bias: helping clients act on their stated priorities.
- Overconfidence: turning instinct into process.
- Status quo bias: showing when inaction is the riskier move.
- Endowment bias: challenging attachment to legacy holdings..
- Regret aversion: helping clients move forward despite uncertainty.
Providing behavioral finance resources can help, but the greatest impact comes from the financial advisor who can respond in real time with empathy and perspective. Emotional biases are not flaws to eliminate; they are facts of human nature. The difference lies in whether those biases dictate portfolios or whether advisors coach clients to see beyond them. By aligning risk attitudes with true risk capacity, advisors can help clients become resilient investors rather than reactive ones.
