Painting an accurate picture of a client’s tolerance to risk

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Appetite for diversification

He adds: “In this set-up, most clients often fall in the range from 3 to 7, [so] the risk-profiling exercise allows us to move away from the concept of a ‘typical risk attitude’ and reflect specific circumstances of individual clients.”

Mr Gallacher says: “We use multi-asset funds for a range of risk profiles but typically these are medium or lower risk clients more concerned about preserving what they have.”

Mr Watson says that Janus Henderson has also taken significant flows across the spectrum from low to high risk levels. 

He adds: “In terms of asset allocation, this suggests most clients are suited for an equity allocation from 30 per cent to 60 per cent, which can provide the foundation for a portfolio with complementary bonds or alternative assets to diversify and smooth portfolio outcomes.”

Mihir Kapadia, chief executive of Sun Global Investments, thinks there should be a comprehensive framework in place for risk management throughout the investment process due to market volatility. 

He adds: “From this there will be a much more knowledgeable and positive attitude in place that could create a more appropriate portfolio, which is diversified and has more appropriate risk-return characteristics.”

How risk changes over time 

Research conducted by FinaMetrica in 2019 found that while risk tolerance does not change significantly over time, people’s behaviours and their capacity to withstand losses do change, especially as time horizons shorten. 

So at what points can clients become more risk averse? 

Mr Barry says: “Over time it is likely that a client, working with their financial planner, will move to a lower-risk multi-asset solution as they grow older and their appetite for withstanding market volatility fades.”

Mr Watson says: “Through a client’s investment journey from accumulation into retirement, the anticipated direction of travel would be a decline in risk tolerance over time.”

He suggests there could be a shift in terms of objectives, even if a client maintains a stable ATR. 

“A passively implemented strategy would provide market upside but with a bumpier ride for the client, while more income-focused approaches can smooth returns and provide stable income to supplement the pension income of clients no longer in work,” adds Mr Watson. 

While Mr Pioch acknowledges that a longer time horizon generally means a higher ability to take risk, he highlights that time horizon is just one of many considerations included in a typical risk questionnaire.

“Behavioural biases might also play a role and these evolve through our lifetimes, shaped by our individual experience.”

Mr Pioch adds: “Advisers play a very important role in capturing specific client circumstances that fall outside of a standardised set of 10 or 20 risk questions, and this way they can paint a more accurate picture of the client’s attitude to risk.”