How is a client's ability to assume risk primarily determined?

A client's ability to assume risk is primarily determined by their financial goals relative to their resources because this assessment involves looking at both the client's financial situation and their specific objectives. Understanding the client’s goals allows for a tailored approach to risk tolerance, as different goals may require different levels of risk exposure. For example, if a client has a long-term goal that requires significant capital, they might be in a position to take on more risk, assuming their financial resources can support it.

In contrast, personal preference, while important, is subjective and may not accurately reflect a client's overall financial capacity. Investment knowledge is beneficial for making informed decisions, but it does not directly impact the financial reality that determines risk tolerance. Market conditions can influence investment outcomes but do not inherently change a client's personal ability to bear risk based on their financial goals and resources. Therefore, the best way to assess a client's capacity to assume risk is through a careful analysis of their financial objectives in relation to their available resources.