For many, life is busy right now. The world is opening back up, people are trying to set some form of normality into their lives; be it back to the old and familiar, or a new way of living and working – this is very much the same with the firms we work with.

A lot of firms are reflecting and asking themselves ‘do we go back to doing things as we’ve always done them or, do we use this opportunity to adopt some new ways and get up to speed with things we’ve always wanted to do, but have never quite been able to or got right yet?’ – okay, so maybe it’s not a direct quote, but you get the gist.

These are conversations our team over at Apricity has been having regularly with our clients, and conversations of late have focused around the firm’s advice piece and specifically how we can assist firms to finally get their capacity for loss assessment correct. It’s the often-maligned third element of the trilogy with attitude to risk and knowledge and experience. The regulator has been talking about it for the past ten years (yep, we know, ten!), but in our experience, it’s the element firms struggle with most and as such, the output is too often a mishmash of subjective waffle.

“You have a medium capacity for loss”, “you can withstand some losses”, “at present, you do not need this income (client is five years from retirement), so could stomach some losses”. All true I’m sure, but none are an accurate assessment of a client’s capacity for loss. So how do we feel this should be approached and what is the long-term benefit to the client and adviser, which is always at the forefront of our minds?

Attitude to risk is an emotion. Knowledge and experience are facts (but can develop over time). Capacity for loss is purely factual; ‘how much money can you afford to lose before the loss impacts upon your retirement plans?”. If the first two parts have been done for many years and you know the client well, then the third element is simply working out how much they want and need to live on in retirement (two very different assessments of income requirements) and assessing their capacity for investment losses.

To get this right, advisers need to gather both hard and soft facts. Sounds straightforward enough but this continues to be a stumbling block. We continually ask our clients to consider the following;

  • Do you have enough detailed personal information from the client?
  • Have you identified clear and ‘quantifiable’ objectives from those personal details?
  • Have you created a financial plan to meet those objectives?
  • Can you demonstrate how sudden losses, changes in circumstances or variations in plans will impact the outcome?
  • Do your recommendations take all of the above into account?

If not, then capacity for loss will remain a nice to have, rather than be the focus in terms of the annual review conversation. You will likely still be talking about the last years’ investment performance rather than whether the client is on track to meet their goals, which if they are, puts the uncontrollable investment performance down the list of details and priorities.

My question is, therefore; are you able to truly demonstrate that you’ve assessed your client’s needs, objectives and the emotional elements that affect their plans? If so, are their minds at ease by knowing that their investments could fall by 50%, or underperform the target by 3% per annum, year after year, but they are still on track to achieve all they want and they don’t need to be concerning themselves, or ringing you looking for reassurance?

If the answer is no, or maybe, then please take a gander at our recent and most downloaded whitepaper to date and see if it helps.

Christian Markwick – Head of Adviser Support, Apricity Compliance