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Architas publishes top tips on discussing capacity for loss

by Jun Merrett on Jan 07, 2013 at 14:13

Architas publishes top tips on discussing capacity for loss

AXA-owned multi-manager Architas has published a five point plan to help advisers discuss capacity for loss with their clients.

The guide follows research by Architas which found that 44% of advisers thought the Financial Services Authority's (FSA) guidelines on capacity for loss needed clarification with a further 24% of advisers saying they covered the topic under 'appetite for risk' despite the regulator's stance that the two should be treated separately.

The tips include:

  • Make capacity for loss as a distinct part of the fact find process, separate to attitude to risk.
  • Consider non-financial issues that affect a client's capacity for loss including lifestyle and well-being, which could also impact on a client's ability to withstand losses.
  • Use cashflow planning which will show clients the effect of losses on their future financial situation.
  • Review capacity for loss on a regular basis in the same way that attitude to risk is regularly reviewed.
  • Make specific reference to capacity for loss in any client correspondence in relation to their investment choices.

Casper Rock (pictured), Architas chief investment officer, said: 'From our research and our dealings with advisers, it is clear that more needs to be done with respect to capacity for loss. The FSA has identified it as an area of interest, but it has not offered evidence of best practice as to how it should be documented or presented from a compliance perspective.

'Our intention is to draw attention to this area of investment suitability, and ensure that advisers are better equipped to discuss this with clients.'

6 comments so far. Why not have your say?

Captain Hindsight

Jan 07, 2013 at 15:42

'The FSA has identified it as an area of interest, but it has not offered evidence of best practice as to how it should be documented or presented from a compliance perspective'

Of course they have not...... Much better to be evasive and obscure, forcing a macabre guessing game from which you can be punished in the future should you fail to 'guess what the FSA has in its pocketsses'

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Will Watling (Capita Financial Software)

Jan 07, 2013 at 17:44

In the mortgage, loan market there's a well recognised figure that everyone understands & can apply to their personal situation - APR. We need a 'CFL' figure similar to this in the investment market, that people can equally understand the impact of. I'm proposing the approach & calcs in person to the FSA tomorrow. Interesting to get their feedback.

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Man of Kent

Jan 07, 2013 at 18:46

Will, I don't think it's the lack of a figure that's the problem - we already have such questions around Capacity for Loss - e.g. "can you afford for the value of your capital to fall by 5%, 10%, 20%, etc?" It's the lack of in-depth discussion of this broad subject, as indicated by the AXA suggestions, and instigated by a decent risk-profiler, that is likely to exercise the Regulator. I hope your approach and calcs look something like cashflow planning.

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Richard Hardy

Jan 08, 2013 at 13:32

If the definition of 'Capacity for Loss' is agreed and the boundaries clearly defined the next obstacle will be for the FOS to understand those definitions and boundaries and apply them correctly.

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david mann

Jan 09, 2013 at 20:16

It's impossible to accurately record capacity for loss unless you have undertaken a meaningful cash flow analysis. Surely most IFAs post RDR are doing this now.

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Julian Stevens

Jan 30, 2013 at 20:20

Adviser: Can you afford to lose this money that we're talking about investing?

Client: No, I need/want it to provide me with a regular income and to grow in value. If I could afford to lose it, I'd go to my local bookie and bet it on the horse I think is most likely to win the 4.30 at Kempston Park.

Adviser: Can you afford to leave it in the building society earning 2% p.a. taxed?

Client: No, I need a better return than that.

Adviser: Okay. Are you prepared to tolerate a modicum of ebb and flow in the value of your investments to achieve over the long term a return better than cash or inflation, even though that cannot be guaranteed?

Client: Yes, I could tolerate that, provided the degree of ebb and flow isn't too severe.

Adviser: Right, that brings us back to the Attitude to Risk questionnaire ~ agreed?

Client: Yes, that sounds sensible.

Adviser: And practical?

Client: Yes, I understand what you're saying. So where does this Capacity For Loss business fit in?

Adviser: Search me ~ something the FSA dreamed up, but they don't seem able (or willing) to define it in terms that any reasonable person can fathom.

Client: Well, can we ignore it then because, like I said, my Capacity For Loss is zero but I'm prepared to accept a modicum of ebb and flow in the value of my investments with a view to achieving over the medium to long term a better return that cash or inflation?

Adviser: Yes, I think so because, if we try to pin down just what Capacity For Loss is supposed to mean, we'll be here all night and still no wiser at the end of it.

Client: Right, let's get on with it then.

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