Investment involves risk. Always. The important thing is to manage that risk in a way which is suitable for each individual. In order for financial planners to be able to find the best level of investment risk for each client, they need to work out the individual’s risk profile.
This involves three elements:
Risk capacity – the level of financial risk the client can afford to take
Risk requirements – the level of risk necessary to produce a return which will achieve the client’s financial goals from the resources he or she has available
Risk tolerance – the ability of a client to cope on an emotional level with the volatility of the market
The first two are financial concepts whereas the latter is a psychological one. The financial planning process aims to find the delicate balance of these three different elements in order to determine an individual’s goals and make suggestions as to how they might achieve them.
Of course we would all like a seven-figure pension pot to see us through our retirement but if we haven’t started saving until we are in our fifties, or if we don’t have the salary level required to generate that kind of sum then compromises need to be found. Part of the financial planner’s role is to explain the different options to a client and arrive at a workable solution – in the case above this might mean saving more per month, retiring later, reassessing investment strategy to take more risk or downscaling retirement plans.
A good financial planner will take plenty of time discussing your financial situation and analysing exactly where you are and where you would like to be. I always carry out a detailed assessment of a client’s attitude to risk and then provide investment strategies tailored to their unique risk profile. I also have access to a wide range of financial products including a selection of multi-asset funds suited to different investor profiles from award-winning investment manager, Tilney-Bestinvest.