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What Advisers Are Saying- business strategy


Given England’s well documented (and keenly felt) failure in the spotkicks department, a strategy of parking the bus and playing for penalties against the Italians is the best definition of risk I can currently think of. And we all know, despite our best attempts to forget, what a return-free risk that was.

With such a volatile economic backdrop and increasing fluidity of consumer lives (and objectives) risk is becoming far more subjective. Advisers appreciate that risk touches every aspect of modern financial advice businesses from client engagement and charging through to fund and fund manager selection. But big questions remain:

The first relates to risk definition: there is strong consensus that while clients measure risk by the seriousness of occurrence, advisers are largely probability focused. There is also a shared feeling that the industry gets lost in too many measures of risk, failing to boil it down to what matters most to clients, which is loss.

As Sherlock Holmes put it: “Perhaps when a man has special knowledge and special powers like my own, it rather encourages him to seek a complex explanation when a simpler one is at hand.” Sound familiar?

This profound mis-alignment raises the question of whether low risk ever truly exists in the eyes of the consumer. Our conversations with advisers confirm that the biggest volume of queries is presently coming from clients concerned about cash safety. This puts into perspective for advisers that true low-risk funds (as defined by the industry) are increasingly at odds with consumer definitions.

Which brings us to the main problem with psychometrics: that when models turn on, brains switch off. In terms of the risk assessment process, most advisers agree with early 20th Century statistician George Box that “every model is wrong but some are useful”. As such, it follows that a fluid dialogue using tools to formalise outputs is best practice.

Risk has to be aligned to goals; never exist in isolation.

In order to better understand client risk and develop strategies to help them achieve their goals, it will be imperative to move beyond simply a matter of tolerance and consider (in tandem):
a: Tolerance
b: Capacity (both assets and capacity to lose money)
c: Client goals (across life stages)

Using advisory skills to reconcile them when they do not match (a largely undervalued part of the risk conundrum, and one where online tools and systems are redundant) will be key.


All quotes have been taken from interviews with QCF 4-qualified financial advisers from fee-charging businesses

Phil Wickenden is founder of So Here’s The Plan


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