How precise can financial advisors reasonably expect to be in assessing their clients' risk tolerance?

Well, Henry Wendel thought he had the answer nine years ago, when he bought a computer program that was written by a psychologist and was designed to make such assessments.

All his clients completed the test. So did his wife. The program tabulated the answers, churned out a profile, and Wendel went to work crafting suitable portfolios for each client.

Then a funny thing happened. During a move from New York City to Tucson, Ariz., a short time later, Wendel lost his wife's test results. So he had her take the test again. Later, however, he found his wife's original test results and compared them with the second ones. What he found was startling. In the course of just a few months, Wendel's wife had gone from one end of the risk-tolerance spectrum to the other-as if two different people had taken the test.

What was even more alarming, Wendel says, was his wife's explanation for the discrepancy. "She told me, 'Honey, it all depends on how I felt that day,'" he says.

So much for the scientific route, Wendel decided. "I got rid of the program that day," Wendel says. "The funny part of it is my wife is a mental-health counselor."

Many advisors with years of experience trying to grasp their clients' ability to endure financial pain and suffering will attest to the fact that risk-tolerance assessment is far from a precise science. Many, in fact, say they carry out this basic component of financial planning with a combination of techniques culled from years of trial and error. Often, advisors use a mix of finance, psychology and instinct, with maybe a questionnaire or two thrown in, to form a basis for putting together an investment plan. It is, they say, a fuzzy process-which is ironic considering it makes up a large part of the foundation of a client's investment plan.

Ron Meier, professor of investment planning at The College for Financial Planning, says he has yet to find a "magic bullet" when it comes to assessing risk tolerance, despite the abundance of available questionnaires, computer programs and techniques.

"I've been working on this and thinking about it for 15 years, and I can't find anything better than talking to people," he says. "The way you get a feel for it is spending more time talking to people, rather than spending time having them fill out a computerized survey form."

Meier, managing director of Value Investment Counsel in Littleton, Colo., has tried what he calls the "sliding bar" approach to risk-tolerance assessment during his career. He's given clients standardized questions, recorded answers and assigned ratings. Too often, however, he says the results are too detached from reality. Say, for example, two spouses take a risk-tolerance test, and one scores 82 and the other a 12, Meier says. Trying to reconcile the numbers would be a matter of guesswork. "What do you do, make the score a 50?" he asks.

Rick Adkins, of the Arkansas Financial Group Inc., in Little Rock, Ark., says his firm uses a combination of six methods for assessing risk tolerance, including questionnaires and having clients make selections from a menu of fictional portfolios. "Number one, you'd better use multiple methodologies of confirming risk tolerance," he says. "And any instrument you use is really an instrument which will facilitate a dialogue between you and your clients."

Wendel, for example, is now less scientific and more personal in how he goes about assessing how much risk his clients can stomach. Instead of a written questionnaire, he'll toss out questions during the course of conversation that are designed to get them talking about risk.

The questions will start out simple, like, "If you hired me today, and tomorrow, after I invest everything, the market drops 10%, how would you feel? How would you feel if it dropped 15% or 20%? Would you still want me as your advisor?" Wendel says. Then, over the course of the next few sessions, he may ask the same question in different ways to test for consistency.

If it's a couple, he may try to open up the quieter of the spouses by throwing a few questions at them that could almost be taken as small talk. "When you go shopping, do you tend to buy swimsuits in the winter and overcoats in the summer?" is one of his favorites.

As he puts all the information together, Wendel doesn't use a point system. He uses his gut. "What you really need is conversation," he says. "You have to get to know the person."

Al Coles, of Financial Design Associates in Stinson Beach, Calif., is blunt on his feelings about risk tolerance-based investing in general. "Risk tolerance is a flawed concept and flawed methodology," he says.

Coles' view is partly shaped by a profile test he took earlier in his career that concluded he should get involved in high-risk gold investments. The reason? He was a 35-year-old male who liked to skydive and bungee jump. "It's all mush with no core," he says. "We're designing portfolios based on mush."

Coles says he introduces clients to the concept of risk by identifying their goals, building an investment plan and then talking about risk as the last step. If the plan is tweaked to lower or heighten risk, he says, the focus is on explaining to clients how the adjustments affect their ability to achieve their goals.

Calling the system one that's goal-oriented, Coles says he refuses to deal in hypothetical questions, such as "What's the most you could stand to lose in any one 12-month period?"-a common question in risk profiling. Any conversations about risk are based on the client's real situation and goals, not hypotheticals, he says. "We're talking about risk not in terms of fluctuations on charts, but in terms of what you want to do in life," he says.

Sometimes clients are more tolerant of risk than they realize, says Michael Furois, president of The Planning Associates Inc. in Chesterton, Ind. "It is from that starting point that the education process begins," he says.

He cites the case of an elderly widow who 10 years ago had all $200,000 of her money in cash investments for the sake of safety. Feeling the woman would benefit by moving into equities, Furois shifted her money into mutual funds a little at a time over the next several years.

Each step of the way, he made sure she scrutinized the monthly performance of the funds to get a taste of market volatility and the risks of equity investing. "She now has a balanced portfolio, and she's gotten used to the market's ups and downs," he says.

After getting to know clients, what an advisor may find is that people's risk tolerance isn't as divergent as some indicators may lead one to believe, says David Diesslin of Diesslin & Associates in Fort Worth, Texas. "What we've confirmed in my own heart is that people really aren't that unique," he says. "They want relative returns in good markets and absolute returns in bad markets."

Diesslin says that partly tongue-in-cheek, but underscoring the statement is a simple fact: Most clients don't know their tolerance for financial pain until they've felt it. "Some investors have found they are not who they thought they were," he says.

Dan Moisand, president of Optimum Financial Group in Melbourne, Fla., says one of his teaching devices for inexperienced investors is a simple chart showing the monthly returns of the S&P 500 since 1946. The chart instantly illustrates the wild short-term gyrations in the market. "They get it pretty quick," Moisand says. "If they've had no experience, we have no reference point. It's a little more difficult, and they require more coaching."

Considering how imprecise risk-tolerance assessment is, advisors say they've been surprised at how resilient their clients have been since the terrorist attacks of September 11 and through the turmoil that has followed.

One possible reason, says Marjorie L. Fox of Rembert, D'Orazio & Fox in Falls Church, Va., is that in the eyes of clients, there is no mystery behind the market's most recent decline. "Most clients have expressed the fact that the terror attacks made them better able to deal with the decline than if it had been a burst of a bubble or a particular investment gone sour," Fox says. "There was something about the circumstances that made them more resilient. Maybe it's patriotism, stubbornness, a sense of community-I don't know."

Tom Grzymala, president and CEO of Alexandria Financial Associates Ltd., in Alexandria, Va., says his firm has been reaching out to clients since September 11 to talk about the recent events, their impact on the market and how clients are responding.

In some cases, he says, client assets are being moved from equities to REITs and other more conservative havens, under the thinking that the future is too uncertain. "This is going to last for a while," he says. "It's not just here today and gone tomorrow."

Grzymala says recent events have served as a "wake-up call" to clients who had been overly optimistic about the market, and he has seen changes in the way clients view risk. "Referring to the popular one-to-10 risk-tolerance scale, with one being the least tolerant," he says, "A lot of people who used to be six or seven are becoming four or five. We had a young person come in here with a risk level of three. That used to be unheard of."