Risk profiling doesn’t start and stop with an Attitude to Risk (ATR) questionnaire. It sits within a larger process, which is carefully followed until all parties are happy with a final output.
To begin with, an initial picture of a client’s ATR is evaluated. Capacity for Risk and Investor Experience are evaluated separately in Dynamic Planner and are there to help prompt a documented discussion to allow you the adviser to use your expertise to analyse softer facts about the client.
Dynamic Planner’s ATR questionnaire flags any inconsistencies in a client’s answers. These again provide a natural opportunity to have a conversation and ensure the client understands the questionnaire and concepts covered within it. Combining this with information from the Capacity questionnaires, advisers can choose an indicative risk level, which is then discussed with the client.
The adviser can use Dynamic Planner’s Value at Risk questionnaire to show the likely range of outcomes and decide if they are acceptable. If not, a new risk level is selected and the discussion is repeated until a suitable risk level is agreed. It is then important to review the client’s risk profile at their next review; see if the client is still happy with their investments; complete the questionnaire again; and see if there have been any big changes to their finances or wider circumstances.
Accurate risk profiling is a great way to reach potentially a clear, metric change in a client’s risk profile since their last review. It also gives you the adviser peace of mind to focus on the discussion it sparks and releases time to fully explore.
ATR, of course, is the amount of risk a person is prepared to take, while Capacity for Risk is the amount that they can afford to risk. A person’s knowledge of their capacity can impact their ATR as measured in a psychometric tool, but they are different concepts.
It is possible for a client to have a high ATR but a low Capacity for Risk (someone, for example, who enjoys picking stocks but has little money) or a low ATR but large capacity (someone, for example, who is decades from retirement and already has sufficient Defined Benefit / State pension to cover basic costs, but who doesn’t want to take any risk with their small Defined Contribution pension pot). In these cases, some education, including stochastic projections, can enable someone to accept a different level of risk than initially indicated.
While we wouldn’t expect Investor Experience to necessarily affect the products recommended, it does provide insight into how to provide advice, the amount of coaching a client may need and the amount of time needed to be set aside to ensure the risks involved with investing are completely understood.
While most people will rightly worry about taking too much risk – and subsequently suffering large losses – there is also a risk, perversely, of taking too little risk. When it is a long-term investment solution, for example a pension, it is very likely that a higher risk product will outperform a lower risk product. Taking too little risk, in that scenario, can have a poor impact on the client’s financial wellbeing. Again here, stochastic projections – or the 20-year line on the Value at Risk table in Dynamic Planner – can demonstrate to the client how riskier investments may perform similarly or better than lower risk ones, even in poor investment conditions.
One of Dynamic Planner’s biggest and core strengths is that it risk profiles investors and investments using the same assumptions. This naturally leads to a fully joined-up process where you, as the adviser, can be sure that the two are suitable and seamlessly match – a perfect marriage for all parties.