Risk profiling – helps to ensure the suitability of investments for clients

In order to be able to advise our clients correctly, we need to sit down with them and find out more about their financial personality, i.e. where they are now and their willingness and ability to take risks.

It’s not simply a case of someone being cautious, balanced or adventurous any longer, there is something a little more scientific behind the work that we do. That’s why risk profiling plays an essential part in helping us to ensure the suitability of investments for clients. And we hope that this goes someway to reassuring you, that when you refer clients to us, we will always ensure that any financial planning we undertake is closely aligned with a client’s financial personality, as well as their needs and objectives.

Every client is different and it is these differences that we need to discover through two different routes, initial discussions and by using risk profiling tools. Only by utilising this two-pronged approach can we hope to understand how our clients feel about their money and advise them accordingly. Whilst the discussions are always fruitful, the tools are very visual. This enables clients to see clearly the degree to which they are prepared to expose their capital to risk and how they would expect to be rewarded in return for taking that risk.

During the risk profiling exercise, we are trying to find out and assess our clients:

  • Emotional tolerance to risk
  • Financial capacity for risk
  • Perception of risk
  • Ideal asset allocation
  • Expectation of returns

Using the information from our discussions and the tools enables us to create a plan that will attempt to meet the needs of the client, while considering their views, insecurities, and appetite for risk. This plan will provide the ideal asset allocation for their investment portfolio, to match their goals and include cashflow and budget planning, risk management recommendations, tax strategies, investment portfolio recommendations, assumed returns and proper estate planning.

Ideal Asset Allocation

Depending on the client’s attitude to risk, this is a graphic representation of what an ideal asset allocation looks like:

The process of evaluating a client’s risk profile and building a comprehensive financial plan provides them with both balance and understanding about how a financial plan will react during good, bad and stable financial periods. It also helps to comprehend the possible returns measured against their agreed levels of risk.

Returns against Risk

This is a graphic representation of what ideal returns against risk might look like:

On an ongoing basis, we monitor and advise our clients on all aspects of their plan, including cashflow (see January’s newsletter article Planning a Route for Financial Success) to ensure they remain on track for achieving their goals. And because a clients’ risk profile can change, we review it on an annual basis to ensure that the financial plan we have designed for them still matches their requirements.

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