The Joint Influence of Financial Risk Perception and Risk Tolerance on Individual Investment Decision‐Making

Abstract

The increasing complexity of the investment environment has accelerated the need for better quality financial advice services. Central to quality advice is advisers’ accurate assessment of their clients’ risk characteristics. Typically a client's risk characteristic is assessed by measuring the client's risk tolerance but not risk perception. To assess whether this practice fails to fully capture the client's risk profile, we explore both risk tolerance and risk perception in the investment decision‐making context. Using Australian online survey data of financial adviser clients (n = 364), our results reveal that risk tolerance influences risky‐asset allocation directly and indirectly through risk perception. These results thus clarify the joint role of both risk constructs in the investment making decision and highlight the importance of assessing both in the provision of client financial advice services. Importantly, our results validate a new comprehensive risk perception measure applicable in the financial advice context.