Our approach involves a methodical assessment that starts with understanding the client’s business goals, industry context, and past experiences with risk. We begin these conversations by asking open-ended questions that encourage clients to reflect on their comfort levels with various types of risks, such as financial, operational, or reputational. We also explore their past decisions in situations involving significant uncertainties. This not only helps us gauge their risk tolerance but also their expectations from our consultancy in managing that risk. For example, we worked with a startup in the biotech sector looking to expand into new international markets. Recognizing the high stakes of entering unfamiliar territories, we thoroughly assessed their risk tolerance. Their feedback revealed a moderate risk appetite, prompting us to recommend a phased market entry strategy. Instead of simultaneously launching in multiple new markets, we advised starting with one region that had the most favorable regulatory environment and market demand. This approach minimized potential financial losses and allowed the client to adapt their strategy based on the initial market's feedback before proceeding further.
Risk tolerance is fuzzy term for most clients. They understand the principle, but often can’t quantify or describe their own. So in most cases I will start with a risk questionnaire which spits out a number. After that we delve into time line and goals. Depending on how well everything matches up, I will either implement an appropriate portfolio strategy or, if not, help them understand the implications of their risk tolerance preference relative to their time line and goals.