In "Time for Another Look at Client Risk Tolerance?" author Ed McCarthy, CFP, notes that "Financial planners routinely measure clients' risk tolerance, either formally with a written questionnaire, informally through conversation, or most likely, with a combination of the two discovery methods."

He notes that a survey by FPA and his own interviews with planners found a relatively small percentage of clients wanting to bail out of the market. "Nonetheless, the reported degree of investor panic raises questions about the value of risk-tolerance questionnaires: Is it possible to measure risk tolerance accurately? Are current market conditions—up or down—the primary determinants of contemporaneous risk tolerance? If it can be measured, what is the best method for doing it correctly?"

McCarthy spoke to some planners who don't use risk-tolerance questionnaires at all. "I have long been a believer that 'risk tolerance' tests are outright dangerous," said Bert Whitehead, J.D., president of Cambridge Connection Inc. in Franklin, Mich. "First, risk tolerance is much too situationally variable to measure psychologically. Second, and more important, it is an abrogation of our responsibility as financial advisors to use a paper and pencil parlor game as a basis for asset allocation."

But the majority of planners either use written questionnaires—their own creations or from third parties—or do interview-based assessments. And that's where planners sometimes go wrong, say the experts.

First, in attempting to gauge a client's willingness to endure the ups and downs of the market the advisors too often ask the wrong questions. John Grable, CFP, Ph.D., and professor at Kansas State University's Institute of Personal Financial Planning, has conducted extensive research into questionnaires. One problem is that some advisors confuse a client's time horizon with their risk tolerance, a mistake the current market has exposed.

"Just because you have a long time to invest doesn't mean that you have the ability to withstand those losses or even the willingness to take the loss," said Grable. "So you look at today's market and people who are 40 years old are bailing out of the stock market. We assumed that they have 30 years until they needed the money and they should hold in there. But time horizon is not the same as risk."

Another common error is not asking enough well-prepared questions. Geoff Davey, co-founder of Finametrica Pty Limited in Sydney, Australia, is an expert in psychometrics, the psychological discipline used to develop questionnaires that measure something. He says risk-tolerance questions usually have not been tested for their validity and reliability. He also says that in an effort to keep it easy for their clients, financial advisors don't ask enough questions—often 10 or fewer. Instead, advisors need to ask at least 20 good questions.

Grable says he's observed that many financial advisors frame their face-to-face risk-tolerance conversation with questions about what the client would do if the market were to fall by a given percentage. He believes this often fails to elicit candid responses, especially among men. "They don't want to be perceived as a financial wimp."