Risk v Reward
Different people have different Attitudes to Risk. You need to be clear about the degree of risk you are willing to take and your capacity to withstand capital losses and how this would affect your lifestyle before undertaking any kind of investment
Understanding of the risks involved in investing
It is important that when making decisions in relation to your financial planning that you are aware of and fully understand the potential risks involved e.g.
- Capital risk – not getting back as much of your money as you originally invested / losing some of the return already achieved
- Income risk – where you are investing for income, the risk that the income level achieved is less than you had expected.
- Liquidity risk – not being able to get your money back when you need/want it.
When making an investment and during the time you hold it you need to take account of these risks and consequences that these may have on the achievement of the goals in your financial plan. Risk profiling is the process for determining an appropriate investment strategy for you with regard to risk. It has four primary aspects, your views on which we take into account in making our recommendations to you.
1. Assessing risk required
We talk with you to understand your goals, current and anticipated income and expenses, and current and anticipated assets and liabilities. We work through with you the return needed to meet your future cash flow needs. In turn we agree the most appropriate investment solutions for your needs.
2. Capacity for loss
Your capacity for loss is a second key element of your overall appetite towards bearing capital risk i.e. your ability to manage financially if a loss occurs.
The FCA refers to “Capacity for Loss” as being a customer’s ability to absorb falls in the value of their investment. If any loss of capital would have a materially detrimental effect on a customer’s standard of living, this should also be taken into account when assessing the risk a customer is willing and able to take’.
3. Risk tolerance
Unlike risk required and capacity for loss, which are financial calculations, risk tolerance is psychological. Risk tolerance is how you feel about taking risk. For example, you may say that it is very important that your investments maintain their purchasing power and also that any fall in the value of your investments would make you feel uncomfortable.
4. Your Knowledge & experience of financial products
Knowledge and experience is about assessing what your previous experiences have been in relation to various types of financial products. As part of this we consider what different financial products you have previously purchased and whether you have done this having received advice or whether you acted on your own without any advice. This helps us to assess your level of understanding of different products.
We discuss all of the above with you prior to making a recommendation.