UKMay 30 2017

Advisers fear challenging clients' attitude to risk

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Advisers fear challenging clients' attitude to risk

Of the 210 advisers surveyed by FE, just 18 per cent regularly encourage their clients to take on more risk to help them reach their financial goals.

The research provider also found that 10 per cent of advisers never encouraged their clients to move higher up the risk ladder.

Rob Gleeson, head of research at FE, said advisers could be reluctant to increase the risk tolerance because they fear a regulatory comeback.

But he pointed out that advisers are unlikely to suffer a hit by the regulator if the correct processes have been followed and documented.

According to the report, 67 per cent of advisers are unconvinced that increasing risk will actually lead to materially increased returns.

This shows that their cautious investment approach is actually dangerous. Scott Gallacher

This comes as a report from Seven Investment Management found that many default pension funds were failing to take on enough investment risk, meaning many savers are at risk of running out of money before they reach the end of their lives.

FE also found that more than two-thirds of advisers are failing to monitor underperformance of funds against their own risk targets on an on-going basis.

Mr Gleeson said: “Communicating the various types of investment risk to clients is complex and a daily challenge for most advisers.

“The reality is that most investors dislike losses much more than they enjoy any gains and advisers are mindful of this.”

But he suggested that advisers centre the conversation around financial goals so they can explain to their client that a change in their attitude to risk is needed to achieve them.

Mr Gleeson said not all advisers have access to the full range of tools available to help deal with all aspects of risk, or some simply do not know how to use such tools to their full potential.

Scott Gallacher, chartered financial planner at Rowley Turton Private Wealth, said he was surprised by FE’s findings, saying it was an adviser’s job to challenge clients’ expectations from time to time.

He pointed out, for example, that he has worked with widows who have been incredibly cautious because they don’t want to risk the provision their late husbands have left them with.

“However I've shown them that a cautious approach would risk them running out of money in their early 80s.

“This shows that their cautious investment approach is actually dangerous and they need to take a more medium risk approach to reduce the risk of outliving their money.”

Mr Gallacher stressed that the client is free to decline the advice and continue with a cautious approach, but added: “Assessing and explaining the impact of different approaches is key to being an adviser.”

katherine.denham@ft.com