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Phil Wickenden: Start with client goals, not risk

There are a few things in life that are better done backwards. Take moonwalking, reminiscence and Arsenal shirt wearing the wrong end of the Seven Sisters Road.

To be clear, by “backwards” in that latter point I refer to the advised act of wearing said shirt back-to-front (or inside out), as opposed to the rather more perilous interpretation of walking in reverse around Tottenham in full Arsenal regalia, which would do little more than confuse and anger the natives. Thinking backwards can also pay dividends. Asking “where do we finish?” is a more thought-provoking question upfront and one we may benefit from using more often for risk assessment and portfolio construction.

The subjectivity of risk has reduced terms like “cautious” and “balanced” to little more than marketing speak and advisers agree they are becoming less helpful in determining the appropriateness of investment solutions for individual clients.

There is the suggestion, as an industry, we have become too probability focused and driven by the likelihood of outperformance, but the new-world difficulties of an old-world approach may become apparent sooner rather than later and businesses selling advice on the basis of achieving higher-than-average returns will struggle the moment they fail to achieve them.

Historically we have asked the question “what level of risk can you take?” and arrived at a score based on the outputs from various whizzy questionnaires – which duly point to an appropriate range of solutions that will likely provide whatever return over however many years – but is a better approach doing things in reverse? Are clients better served by our starting with the end in mind and:

  • Determining what the investor is working towards (goals, ambitions, lifestyle);
  • Making investment decisions based on achieving the required growth with the least amount of risk.

While there are innumerable elements of risk to take into account, the only one that really matters from the client’s perspective is the risk of not having the money they require to help realise their life expectations when they planned to.

Which takes us back to the old adage “the best return a client can get is the one they expect”, and the more pertinent question an adviser can ask: what is required to maximise the probability of my clients achieving their goals? Starting at the end helps us focus on what really matters – appropriate client outcomes rather than nebulous (often unnecessary) outperformance – and changes the focus from whether something might happen to how it might happen.

Phil Wickenden is managing director of Cicero Research


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There is one comment at the moment, we would love to hear your opinion too.

  1. Agree with all of this. Essentially it’s the same as the FSA/FCA guidance on the three pillars of suitability and risk. Namely:

    1. Personal attitude to risk
    2. Risk they can afford to take
    3. Risk they need to take

    It’s rare the three match up. It may be the client needs to take a lot of risk to achieve objectives but has little room to lose what they have and is a nervous investor to boot. It may be that they have a big risk appetite and can afford to lose plenty but don’t need to take any risk to reach their objective. That’s when a full and frank conversation with the client ensues and learned advice is given…

    Perhaps it might be more appropriate to think of this as a circle – you can start where you like as long as all three are covered…

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