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

TLDR

Client risk tolerance is routinely assessed in advisory processes to guide suitable advice for investment decisions, yet little is known about how financial risk tolerance influences investor choices within the financial advice context. This study examines the influence of financial risk tolerance on investment decision-making, focusing on key determinants such as client financial literacy, trust in the financial advice service, and relationship length. The authors developed and tested a new theoretical model with hypotheses using survey data from 538 Australian financial adviser clients. Results show that higher client risk tolerance predicts better investment decision-making, and that trust and longer relationships with the service are positively linked to financial literacy and risk tolerance, offering insights that could enhance financial advice.

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.