Risk profiling: capacity vs tolerance
What you'll be able to do
Profile both the ability and the willingness to take risk — and when they clash, the lower one wins.
- Capacity = objective ability to absorb loss; tolerance = willingness to.
- They can disagree — generally let the lower of the two govern.
- A portfolio the client abandons at the bottom is the real risk.
A real risk profile has two distinct halves that people constantly confuse. Risk capacity is the objective ability to absorb loss — driven by time horizon, income stability, and how much of the goal depends on this money. Risk tolerance is the subjective willingness to ride out volatility without panicking. A complete profile needs both, because they can disagree.
When they conflict, the lower of the two usually governs. A client may have the capacity to take lots of risk (young, long horizon) but the temperament to sell at the first 20% drop — and a portfolio they abandon at the bottom is worse than a calmer one they stick with. Conversely, a risk-eager retiree drawing income has the willingness but not the capacity, and capacity must win.
Good profiling is a conversation, not just a questionnaire score. Ask how they reacted in past downturns, what the money is for, and when they'll need it. The output is a risk level you can defend in writing — the anchor for every product recommendation that follows.
Key points
- Capacity = objective ability to absorb loss; tolerance = willingness to.
- They can disagree — generally let the lower of the two govern.
- A portfolio the client abandons at the bottom is the real risk.
- Profile through conversation and past behaviour, not just a quiz score.
Examples
A 68-year-old living off their portfolio says they 'love risk.' Their capacity is low because they're drawing income now — capacity should cap the equity weighting regardless of their appetite.
Pitfalls
- Treating a questionnaire score as the whole answer.
- Letting a high tolerance override a low capacity (or vice versa) instead of taking the lower.
Ask your sales coach
In a real Adept rollout this routes to your firm's compliance-approved Claude project; in the demo it opens a fresh Claude chat. Never share real client details.