How much risk are your clients really ready to take?

29 November 2018

It doesn’t matter whether you see your clients for the first time or as a part of their annual review, understanding the risk they are willing to take and accept is crucial for providing suitable advice.

Of course, you start with a fact find to understand your clients’ goals and what they are trying to achieve, as well as how much they are planning to invest initially and on an on-going basis and for how long.

The question about questionnaires

Then there is the risk profiling step. Can you ultimately quantify the risk your clients are ready to take just by using a standard questionnaire? Does the length of the attitude to risk questionnaire matter? What are the right amount of questions to ask? There is no easy answer to this.

As a part of the Engage financial planning tool, we offer our customers the choice of A2Risk, Finametrica or Oxford Risk questionnaires. The thing is, risk profiling doesn’t stop with your clients filling in a questionnaire.

Modelling outcomes

At Defaqto, we thought something was missing. Asking a few questions might not paint the right picture for your clients to make their decision. We see the initial questionnaire results as identifying your client’s natural risk profile and providing a starting point for a conversation with your clients rather than an end to it.

The other elements we look are the clients’ capacity for loss, their required return and the commitments they can make. Based on this information, Engage uses Moody’s stochastic modelling to project the likely outcomes, as it is a good tool to use in a conversation with clients. Are their investment goals achievable? Or do they need to contribute more or save for longer? Would accepting a different risk help them to achieve their goals?  

Investment scenario

Graph 1 illustrates a possible scenario with a client, using the Moody’s projections. This client, with a natural Risk Profile 5, is planning to invest for 15 years for their retirement. With initial deposit of £67,000, he/she can commit to saving £670 on a monthly basis. He/she requires to save a minimum £262,500 (represented by the Capacity for Loss in the graph), while the target is £350,000 (Target Amount in the graph).

Graph 1 - Projected outcomes for a client with a natural Risk Profile 5.

Graph 1 - Projected outcomes for a client with a natural Risk Profile 5.

As you can see, even with a timeline of 15 years, he/she is not guaranteed to achieve the investment goal, represented by the grey dotted line in the graph. It is possible that the client can’t save more money on a regular basis nor can they extend the time for their investment.  In this situation, Engage helps you to easily explore the impact of choosing a different Risk Profile.  Graph 2 illustrates that in 15 years, however, the impact of investing in a portfolio risk rated 5 can be quite a significant compared to a portfolio risk rated 7, especially if the market conditions would be good. At the same time, if the scenario would be different and the client was willing to invest for only a short period of time, portfolio risk rated 5 might be more suitable. This is especially important to take into account during yearly reviews as attitude to risk changes. However, always consider your clients’ particular situation to establish which Risk Profile is suitable for them and matches their appetite for risk.

Graph 2 - Comparison of projected outcomes between natural Risk Profile 5 and agreed Risk Profile 7.

Graph 2 - Comparison of projected outcomes between natural Risk Profile 5 and agreed Risk Profile 7.

When doing a client review in Engage, Engage will then automatically X-ray current investments to see if they are still aligned to your client’s agreed Risk Profile to help ensure ongoing suitability. This is also included automatically into the report for your client.

The bottom line

Risk profiling is not just about completing a questionnaire. An adviser should always take into account a clients’ particular situation and preferences. The risk profiling process built into Engage provides an excellent way for you to discuss your clients’ goals and agree realistic expectations.

You can continue reading Key ingredients of suitable advice.

Learn more about Engage Core, our end-to-end financial planning tool, or to request a demonstration, here.

If you are a current customer and would like to learn more about how to use Engage for risk profiling, don’t hesitate to contact Customer Support at or 01844 295544 Monday to Friday between 9 and 17:30.

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