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.'