While investors frequently focus on the expected returns on their assets, risk management in investing is equally important.

Financial advisors who assist investors reach their goals must consider risk.

Every financial advisor must examine four elements in wealth management: – Risk capacity – Risk tolerance – Risk alignment – Risk-assessment tools

Risk capacity An individual's risk capacity is the most risk they can accept given their finances.

Risk tolerance Risk tolerance refers to a person's risk preferences. There are risk-averse, risk-neutral and risk-seeking investors.

Risk alignment When risk capacity and tolerance overlap, risk alignment occurs. If the 50-year-old man with poor risk capacity is also risk-averse, there is alignment.

Misalignment can occur in two ways: – A person with low risk capacity is risk-neutral or risk-seeking. – A person with high risk capacity is risk-averse.

Risk-assessment tools Inaccurate risk capacity and tolerance measurements make risk alignment difficult.