As referred to in our previous article “The 5 Step Financial Planning Process” a client’s risk assessment is completed at the very early stages of the process. It will dictate the clients risk rating and ultimately the investment strategy pursued with the objective of achieving the client’s financial goals.
Sophisticated risk assessment has many benefits and this article will concentrate on the most important benefits for client and financial adviser alike.
Risk assessment explained
The financial planning risk assessment is measured under three headings:
1. Attitude to risk:
This measures the clients understanding of the concept of risk and how it applies to their life and financial matters.
2. Tolerance for risk:
This seeks to explore how much volatility a client is prepared to absorb and observe over the lifetime of an investment based on past experience and future expectation.
3. Capacity for risk
This quantifies the clients’ ability to absorb a loss or their rate of change in financial circumstance if a large gain or loss was the outcome of an investment.
Deloitte Pensions & Investments assess the risk rating of a client using a detailed psychometric risk-tolerance test and proprietary software developed by risk assessment experts FinaMetrica.
The client completes a risk questionnaire and entering the answers to the risk profiling tool produces a score of between 1 and 100 placing the client into a risk category of 1 to 7.
Benefits to a client of risk assessment
A client that has been through a thorough and comprehensive risk assessment will experience a number of important benefits.
Benefits to a financial adviser of client risk assessment
Financial advisers employ a comprehensive risk assessment process as they are obliged to by the Central Bank of Ireland and there are also other tangible benefits for the adviser.
Conclusion
Risk assessment is a crucial component of any financial planning process. A properly defined and documented process will give the greatest chance of a successful outcome. It will not guarantee the removal of any future issues but will provide comfort for both client and adviser that a sophisticated and scientific process has been employed.
Deloitte Pensions & Investments is authorised to provide investment and financial planning advice and is regulated by the Central Bank of Ireland.
Enda McGuinness is a CERTIFIED FINANCIAL PLANNER™
Enda McGuinness
Pensions and investments
emcguinness@deloitte.ie
+353 1 417 8557