As Financial Planners, we work with clients to help them achieve financial well-being. This encompasses various approaches, including the implementation of investment strategies, for each and every client we assist These strategies will always carry a level of risk. The biggest driver of disappointing investment returns is human behaviour. Capitulation in the face of market losses will have a detrimental impact on planning goals and outcomes. It is no surprise that one of our primary roles is to ensure our clients do not make rash decisions during times of uncertainty.
Initially, our focus is to ascertain that clients are positioned within an investment strategy that aligns with a suitable risk allocation.
- The client’s specific risk profile. This is a questionnaire that helps us ascertain the client’s inherent attitude to risk.
- The time horizon. This is also a questionnaire which takes the investment time horizon into account. The longer the term the greater the allocation to growth strategies.
- Experience. A client’s level of investment understanding and experience will have an impact on how they behave during periods of market volatility.
- The client’s investment needs. Using our cash flow software, with client engagement, we can identify what investment growth clients will need to achieve their goals.
- The client’s investment capacity. Using the same cash flow system, we can ascertain how much clients can afford to lose. What a client can afford to lose is very different to how much a client may want to lose. This metric is not a target but an important indicator of the client’s financial resilience to investing.
Frequently, the answers to Q’s 1-3 above are not good bedfellows with Q’s 4+5. You could have an inexperienced investor with a cautious attitude to risk, who is embarking on their pension planning and have a 30-investment term. A cautious investment strategy would be disastrous for this client. You could also have an experienced investor with an adventurous attitude to risk but with very few investable assets and a corresponding low capacity for loss. An adventurous risk allocation would be bad advice.
So how do we square that circle?
At Fenrir Financial we now look at risk in two ways. Primarily, we pinpoint the necessary risk allocation that clients should embrace in their investments to successfully attain their objectives. We then put in place an appropriate communication programme that is solely based on our client’s inherent attitude to risk. The tone of communication needed for a cautious investor is vastly different to what is needed for an adventurous investor. Honestly, the aspect of communication is continuously evolving, but we firmly believe that if we can separate the decision on the investment strategy from the client’s attitude and communicate with clients based on their attitude and not their investment strategy. This enables a client to remain calm during periods of volatility resulting in a far higher chance of success in terms of outcomes.