Adviser Insight: Why we need a new approach to risk

Throwing in the towel too early

What information should the financial planner communicate about risk?

It would be useful to develop a version of a risk scale that was as clear as Prof Spiegelhalter’s, and some have tried to. Many portfolio risk measurement tools show something akin to a child’s spinning top where the fattest area represents the most likely outcome. Most of these failed to anticipate the 2008 correction accurately but, even then, most portfolios subsequently recovered to within the ‘safe zone’.

Similarly, the reason thousands of people threatened with repossession of their homes in the last housing slump decided to give up the struggle and hand their keys over to lenders was partly a misconception about the risks involved. Yes, they felt betrayed and confused after the great promise of continuously rising housing prices failed to appear and they were left in negative equity. But it was also because they were suddenly forced to confront the viability of their personal balance sheet – maybe they lost their job, or repayments became unaffordable. It became a straight black or white choice: stay put or go.

Surely any adviser facing these choices today would advise at least attempting to stick it out? That is risk management too, albeit disguised.

The way forward

The challenge for the industry after the retail distribution review is to invent an alternative to the one-size-fits-all risk systems thrown down by the networks and national firms as appropriate solutions to the risk conundrum, and then resume the focus on client education.

Risk is often a mirage that can seem horribly real at the time but is no worse than many other aspects of everyday living. In the 24-hour media age, with its focus on negatives, it is tempting to just disengage rather than understand it properly.

When was the last time you saw the headline ‘£500 billion added to the stock market in another steady week for shares’? That’s what I thought. Risk has an upside, sometimes a spectacularly good one. Motorbikes, bananas and trips to New York can be highly enjoyable and are probably worth it.

Anyway, I am not sure how many microlifes I have spent writing this article or how many you have spent reading it, but at least you haven’t been riding a horse while doing so, have you?

Steve Buttercase is a financial planner and IFA at Sense Financial Solutions