Many advisers are worried about the risk to their firms from their unrealistic risk profiling, according to our recent report UK Financial Advisers: Retirement Propositions. Nearly half of advisers we surveyed reckoned that unrealistic risk profiling for clients was one of their top three business anxieties.
A key issue is how advisers assess clients’ capacity for loss. Clients’ psychological attitude remains broadly the same in decumulation as it was when they were building up their retirement funds.
But in retirement, what does change is their capacity for loss.
How much money can a client lose before their standard of living is affected? This is typically a moving target, affected by changes in the client’s circumstances, by how much capital they have (changing with the markets) and by what returns they can expect in future.
The good news is that close to 90% of advisers say they are routinely reassessing clients’ capacity for loss at annual reviews.
However, where there is room for significant improvement from planning tool providers is how advisers do this.
None of the extant third-party risk-profiling tools claims to do more than a very rudimentary job of assessing capacity for loss. They don’t generally capture the range of circumstances (health being an obvious example) that can have a profound impact.
The lack of any reliable third-party ‘scored’ questionnaire to measure risk capacity means that advisers have to come up with their own methods, often involving a combination of risk profiling, cash flow modelling and a conversation. Unsurprisingly, the outcomes are variable and often seem to get less weight than risk tolerance assessments in the asset allocation process. The challenge for advice firms is to develop methods that can be applied credibly and consistently to all clients.