Financial Advice - Risk

Question 1

Explain what is meant by the term “risk profile”

3

Answer 1

• Level of fluctuation/volatility that clients are prepared to accept in their investment portfolio
• Holding investments that are higher risk may result in unacceptable losses
• If investments are lower risk than they are prepared to accept they may miss out on higher returns

Question 2

Explain why a risk profiling tool might be useful in assessing their attitude to risk

7

Answer 2

• Could help identifyt ATRs for different objectives
• Simple tool/easy to understand
• Standardised questions/repeatable process
• Should give consistent results
• Amir and Karina may have different ATR
• Current assets do not meet stated ATR
• Could provide better understanding of risk

Question 3

Why should an adviser not rely solely on a computer-based risk profling tool to confirm a client’s ATR

6

Answer 3

• Different results for each client would require further discussion
• Different programmes produce different results
• Clients may not be able to relate to content of questionnaire
• Potential for them to misinterpret/misunderstand question
• Will be unsuitable if they have zero CFL
• Different risk may be in evidence for different objectives/timescales

Question 4

Outline the steps that a financial adviser would follow to ascertain attitude to risk

6

Answer 4

• Both clients complete risk profile questionnaire
• This focuses on timescales/priorities/responses to circumstances
• Generate risk score
• Score provides further discussion - asset allocation
• Ascertain CFL
• Adviser and client agree suitable risk profile

Question 5

Explain the importance of reviewing attitudes to risk on a regular basis

6

Answer 5

• ATR differs for different objectives
• Changes based on investment experience/knowledge
• Changes based on personal circumstances/health
• Changes based on income/ any inheritance
• Fund performance ensure investments match ATR
• CFL

Question 6

What does an adviser need to take into account when undertaking a risk assessment

3

Answer 6

Risk Tolerance - Willingness to accept a certain level of fluctuation in investments
Risk Perception - Personal opinion on the risks associated with making an investment - based on prior knowledge and experience
Risk Capacity - actual ability to absorb financial loss - affected by timescale, family commitments, wealth, stage of life