What's Your Risk Profile? (taken from a BV Services training note)

At our recent training session, we discussed risk and assessing clients’ attitude to risk. We all tend to try to find a number between 1 and 10 but I don’t think that this scenario is good enough because when we ask the client his or her attitude to risk on this basis, they don’t have much of a clue. So I think risk assessment has to be broadened and perhaps the Small Print Page redesigned! .

The point about risk is that everybody has a bit of a range of a risk in different circumstances. For example, I have sold a sizeable number of higher yielding corporate bonds (with lots of warnings) to people who previously were no-risk candidates simply on the basis that the sharp fall in UK interest rates has reduced the amount of interest they receive on bank and building society cash accounts. So, in essence, the clients have been forced to amend their risk profile.

Also in my case, I have a number of clients who have other advisers, specifically stockbrokers, or who manage their own share portfolios. So asking them about a specific risk rating when suggesting a new investment must, I would suggest, take into account what investments they have got elsewhere. So if, for example, they say they are low risk but also have a large share portfolio managed by a stockbroker, I think we have to amend that rating. It maybe that the investments we suggest start to offset, in terms of risk, the stockbroker portfolio but this part and parcel of financial planning needs to be done.

For example, I have one client who first of all saved with me in property investment bonds, hurriedly switched to gilt investment bond funds and was also persuaded to invest a large amount of money with Barclays in equities. The upshot is that my portfolio is performing better than theirs! The client recently put a lot more money into high yielding corporate bond funds (does not like ISAs!) and wants a large cashflow so he can decide what he wants to do with the extra income. It is likely that he will invest in emerging markets on a regular basis. So here we have a client who started off being very cautious in property and now could probably be considered a medium risk investor because of subsequent events.

Put another way, risk ratings change and can be redefined by other actions and other assets.

So I think we need to emphasise more (or at least I do) the time span for these investments. In practice, I think we generally don’t change investments much even though we have the facilities to do that via platforms. The big change I last made was from property investment bonds to gilt investment bonds and am now gearing myself up to switch from gilts to index-linked funds as inflation, even on an RPI basis, is a-coming next year.

I find it useful to have a Small Print Page as a backstop. But increasingly I am putting it and some of the comments made here into the body of the reasons why letter.