When looking to advise a client on where to invest their money a very important consideration is their ability to deal with a fall in value. Over the last year, particularly in March 2020, a number of clients experienced a short dramatic fall in value. Whilst, generally speaking, funds have recovered it can be a very traumatic experience watching the value of your investment or pension go down.
As one would imagine, I took a number of calls from clients who wanted to discuss their situation. Some were just looking for reassurance, some wanted to move to cash and some wanted to increase their level of risk to gain better returns if (as happened) funds started to improve.
Out of all these calls there were very few that actually changed anything. I would like to think that this is because of the detailed discussions we have around risk profile and the ability to bear any losses (known as capacity for loss).
In my view, assessing a client’s risk profile is one of the most important aspects of financial planning. In previous blogs we have spoken about how Wingate use Cashflow planning to help build the financial plan. An important aspect of this is being able to demonstrate how a sudden fall in value could impact a client’s standard of living. It is easy to enjoy the good times when the fund is growing but, as we have seen recently, it is so important to consider what would happen if the fund dropped in value.
Whilst it is fairly easy to do this from a financial viewpoint there is also the emotive side to consider. It is no good to have the financial ability to cope with a sudden fall in value but if this then means the client is going to lay awake all night worrying about it one could argue they are not in the right risk profile.
Dealing with a client’s emotional capability is not as easy as using figures to demonstrate but it boils down to understanding what the client wants and using the various tools we have at our disposal to demonstrate this to them.
In addition, not all clients need to achieve high levels of growth to meet their financial objectives and therefore there is no need to take additional risk ‘just for the sake of it’.
Discussions around risk profile are ongoing and a key part of a client’s annual review. Whilst there are plenty of other considerations when financial planning, if someone is taking an unnecessary amount of risk this needs to be clearly explained to them.
A key part of our process is the reviewing of any existing plans, in my view a high percentage of these are not in the risk profile and taking a higher risk than the client is aware of. If you have any plans that you feel need reviewing or would like to discuss your financial plans please contact me for an initial, no obligation, discussion.