Your IndustryJan 11 2013

Take 5: Assessing capacity for loss

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Despite guidance from the FSA, confusion still reigns over risk assessment and capacity for loss. Make sure you’re on the right track with our guide on how to make an assessment.

1. Beware of the client’s view of themselves. A client may believe they have infinite capacity for loss. While their own view is important, their perspective may not fully take into account everything that must be considered. Attitude to loss is not the same as capacity for loss.

2. Check what debts the client has. The impact of a blip in cashflow is far more severe if there are hefty debts. Even if you do not manage the client’s cash, check out what credit they have outstanding as part of the capacity for loss analysis.

3. Look at any future capital needs. A client may not be planning any huge outlays in the immediate future, but will they be helping out with family school fees? Will they be supporting someone to buy their first property? Any investment loss could seriously jeopardise promises made.

4. Consider your client’s age and retirement plans. Capacity for loss becomes more important as your client nears retirement. Risky investments made in their youth are simply less viable as the need for a retirement income looms – there is less time to recover from any poor performance.

5. Account for attitude to risk and capacity for loss. The latter cannot be assessed without the former and vice versa. Get started on the risk-profiling side with our guide to assessing a client’s risk level.

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