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Phil Wickenden: Risk, retirement and raffles

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“Yeah, I entered that raffle but I knew I wasn’t going to win. It’s like winning the lottery, innit?” This from a young gentleman on the tube suggests that a) metaphor use among the yoof of today is not what it ought and b) definitions of risk are just as challenging outside of retirement planning as in.

Separately, I wish I had asked what raffle he entered. Are raffles cool now?

So, raffles and risk (but mostly risk). There is a very clear shift in how financial planners are approaching retirement strategies and they are moving away from traditional risk profiling. An objectives-based approach to planning is becoming more feasible as the nature of advice changes. But as it does, many of the traditional tools used to set retirement income strategies just are not up to the job any more.

In nearly all cases advisers still employ some sort of profiling tool but increasingly there is no straight line to the asset allocation outcome. In other words, things are becoming far from prescriptive: profiling tools are part of the process but no more.

As the trend to blended retirement income strategies continues, risk assessment is becoming increasingly fluid and multiple risk profiles per client are becoming the norm for many advisers. The majority (64 per cent) are dealing with more than one risk profile per client based on agreed objectives per pot, rather than balancing a client’s whole portfolio with just the one definitive score.

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The most pertinent question remains, as it always has been: what is risk to a client? We talk about volatility, we talk about maximising Sharpe ratios and tracking error but this does not mean much to most clients.

The numbers matter but they can never be the final word. Risk is seldom objective or solely the product of the world out there but tightly bound up with each of our own perspectives. So personal perspectives on risk are perfectly reasonable – essential even. There are plenty of ways in which our sense of risk can be distorted, plenty of ways in which people can interpret data in the wrong way and plenty more in which the numbers can be deceptive. The real talent is making sense of it all as a whole. That means understanding the things that matter to each individual client and the stories, fears and hopes that influence them. Only then can risk mean something, well, meaningful.

Phil Wickenden is managing director of So Here’s The Plan

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