As part of your value added service to clients, it’s crucial to consider their investment needs carefully and then try to match their needs with the most suitable investment solution. Not only will this enable you to help your clients reach their investment goals, but it can also help manage their expectations during a volatile market environment.
So in this blog, I’m going to look at:
- the fact finding process
- how to determine your client’s risk score
- how to read risk profile scores and assess suitability.
THE FACT FINDING PROCESS
To start with, your fact find process should cover your client’s:
- personal and financial situation
- expectations
- attitudes and values
- level of experience and knowledge about investing, plus risks associated with investing
- risk attitude including their capacity for loss.
HOW TO DETERMINE YOUR CLIENTS’ RISK SCORES
To help you determine the level of risk appropriate for your clients’ investment goals and timescales, you can use a risk profiling tool. Our risk profiling tool, which is now available as an app, translates an individual’s view on investment risk into a single number – a ‘client risk score’, ranging from 1 to 5.
This risk score should not be treated as a definitive and final risk rating. It is a starting point for a more in-depth discussion with the client about their attitude to risk, their willingness and capacity to accept loss and the time horizon of the investment
HOW TO READ RISK PROFILE SCORES
Time and capacity for loss are not the only critical factors in any suitability assessment process. The risk profile score is an indication of the extent to which your clients are prepared to accept any fall in the value of their investments. These fluctuations in the value of investments are also known as volatility.
Investors with a lower risk profile remain generally wary but are willing to accept a modest level of risk in their portfolio. The emphasis is definitely on safety so a large proportion will typically be invested in cash and fixed interest.
In contrast, those at the higher end of the risk spectrum will be prepared to take greater levels of risk to gain potentially greater levels of return. Their portfolio might hold little, if any, fixed interest or cash and is nearly entirely all equity based.
Let’s consider John who is 35 and not looking to access his investment until his son has the opportunity to go to university in 15 years’ time. Using the risk profiler tool, you have determined his risk score is 4. As John does not need access to his money for at least the next 15 years, he may choose to take on higher risk investments, at least in the early years, because his investment time horizon enables him to accept an increased level of volatility in his portfolio, as this allows any falls in value, time to recover.
Jill on the other hand is 50, her risk score is 1 and she is looking at her investments in a much shorter term horizon.
She is looking at using this investment to purchase a holiday home in Spain in the next few years, hence will need access to it soon and does not want the value of this investment to fall between now and then.
HOW TO ASSESS SUITABILITY
When assessing client suitability, your investment recommendation must take into account not only your client’s attitude to risk, loss, timescales, liabilities, income, their need for access to capital and their growth expectations, but also a range of other factors including their:
• need for investment breadth
• investment knowledge and experience
• need for involvement in investment decisions.
No two clients are the same and their needs may vary over time. This is why it is important that you assess the suitability of all investment solutions and ensure your investment recommendations continue to meet the needs of your clients.
HOW TO ACCESS OLD MUTUAL INTERNATIONAL’S RISK PROFILER
Download our new risk profiler app from Apple or Google Play app stores or access the web version here.
It’s simple to run through with your clients; just eleven questions to assess their appetite for risk. The tool then generates a risk score with a printed summary that you can personalise with your company logo.
Old Mutual International cannot accept responsibility for any losses arising from actions taken or not taken as a result of the information contained in this blog. The value of investments may fall as well as rise and an investor may not get back what they put in.
