What exactly is a risk capacity?

Markets fall 5%, capacity for loss 50%, result: indifference; markets fall 50%, capacity for loss 5%, result: misery. Everyone is talking about client risk capacity. The FSA has made it clear that it expects advisers to consider this concept. So, what is it and how do we assess it? The first step is to separate risk capacity from risk tolerance. Tolerance is about feelings and is impossible to observe directly. You have to ask targeted questions to try to tease out the client’s mental willingness to bear risk. Writing, testing and structuring these questions is a specialised task fall...