Q. How do you ensure a client’s risk profile fits in with their investment goals and overall objectives? How is the risk profile measured? How do you ensure any gaps are covered in the client file; is it appropriate to challenge the adviser who took the information?
Daniel Atkinson,senior technical consultant, EQ Investors
The real risk for the client is them not achieving their objectives, despite having the money available to do it.
The adviser will have done the risk profile and had the discussions about the client’s objectives before it is handed to us.
When writing suitability reports, we try to align a number of factors about the client that are related to risk. We use what we call a risk triangle: their willingness to take a risk, the results of the risk-profiling questionnaire and their capacity for loss. Balancing the three corners of that triangle will help them achieve their objectives.
It is up to the adviser to ensure the client’s information is representative of their wishes and to fill in any gaps with the relevant information.
However, a large part of our role is to challenge the advisers. It is important to ask questions like: Is this fact correct? Will this stand up to scrutiny? Are you missing something?
Our paraplanners review the firm’s 1,000 or so client portfolios a lot more than the advisers do, so we get to see how the portfolios have been behaving in different market conditions. We have to consider what level of risk is sensible for the client’s objectives and capacity for loss.
Some elements cannot be fully captured by a computerised, quantitative process, and risk is one of them.
We sometimes face situations in which clients do not need to take all the risk they are prepared to take, or where the only investment performance they need is sufficient returns to beat inflation.
Sometimes clients are particularly happy to take risk by their nature; sometimes they have the capacity but not the need. It is important they have that pointed out to them.
It is less common to have a client who is too cautious but needs to take more risk. In such cases, it is up to the adviser to tackle that issue with the client.