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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Case Studies in Comprehensive Financial Advice

Mr. Sharma, aged 30, has a 5-year-old savings goal and also a risk profile showing low willingness but high ability to take risk. When finalising an asset allocation, which approach is most appropriate for the adviser?

The adviser should base the allocation on the lower of risk tolerance and risk capacity, which here is his low willingness, and discuss the mismatch with him. Using only high capacity could cause him to abandon the plan during market falls and breaches suitability.

  1. AAlign allocation to the lower of risk tolerance and risk capacity, discussing the gap with the clientCorrect
  2. BUse only his high ability to take risk
  3. CIgnore the risk profile and follow market view
  4. DAllocate fully to equity because his age is low

Explanation

When willingness and ability differ, prudent practice is to base the allocation on the more conservative measure, here willingness, and educate the client on the gap. Using only ability risks the client panic-selling in a downturn. Ignoring the profile breaches suitability norms.

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