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Practice makes perfect

The more you rehearse a scenario with a client, the more prepared they will be if the value of their investments drops

What effect would a fall in value of my investments have on my future finances and how can I prepare for it?

One of our tasks as financial planners is to educate our clients about risk and loss tolerance. It is vital to get clients to complete a risk ques-tionnaire but even more important to discuss the answers and ask questions that dig a little deeper.

One way to do this is to build the financial plan with the client. By having regular meetings with a live financial plan, it is possible to discover different scenarios or rehearse a situation. The more you rehearse, the less of a shock you get if the rehearsal becomes a reality.

Keep it simple. If a client’s plan is not working out, they can do one of three things – inject more money, spend less or get a better return on the investments.

The third option is not guaranteed, so would your client spend less now or in the future? Would they delay retirement beyond their planned date? How would they economise? What are their real lifestyle priorities? Is saving for a child’s university education more important than Sky TV, for example?

Some of these questions may be uncomfortable but are essential in educating the client and will help in creating a successful longterm relationship between the client and the adviser.

On the issue of dealing with investment losses, one of the questions on the risk-profiling questionnaire we use asks clients how far their wealth could drop before they would feel uncomfortable.

It is important to use the live plan to show clients the effect of, say, a 20 per cent drop in invested assets. By adding a one-off expenditure item equal to 20 per cent of the current value of the portfolio rather than the value of all assets, you can simulate the fall and see the overall effect on future cashflow.

The reason for showing this against the invested assets rather than the whole wealth is that, in most cases, it is the invested assets that will produce the client’s income over the longer term.

However, if part of the plan is to downsize the main residence, rehearse the value of the property falling.

Discussions should also take place about inflation. If a client states that any fall in the value of wealth would make them feel uncomfortable, how would they feel about liquidating the whole portfolio and moving entirely to cash? The risk at present is that inflation is seriously greater than cash returns. Is feeling uncomfortable and the trade-off between risk and return something the client could live with and is some degree of risk acceptable?

Conversely, if the future financial needs are somewhat secured by where their finances are now, do they really need to chase a return that displays more risk?

Changes in income is also a scenario that can be rehear-sed. In the event of redundancy or downturn in the economy leading to liquidation, what would this look like? How long could a client survive without income? What if the state pension age increases again, does this make a difference?

The only thing that is certain about the future is that change will happen – and that is guaranteed.

Yvonne Goodwin is managing director of Yvonne Goodwin Wealth Management


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Good article. I heard a speaker recently talking about advisers conversing in terms of Attitude to Loss rather than to risk – clients need to be in tune with how they would really feel in that situation – a lot may show bravado in an ATR questionnaire that wouldn’t necessarily play out the same in real life.

  2. I think you will find that should be practise makes perfect.

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