The FSA has ruled a client's attitude towards risk must be fully assessed by financial advisers before making recommendations
How much risk are you willing to take with your hard-earned cash? Indeed, are you willing to take any risks at all? The Financial Services Authority has ruled that financial advisers must now determine an individual's "appetite for risk" and check "capacity for loss" before making an investment recommendation.
The new approach follows a major FSA investigation this year into adviser practice which found "a high number of unsuitable investment selections". It rated the advice that was given in half of the client investment files it had examined over a two and a half year period, as "unsuitable". It said the main problem was a failure to assess an investor's attitude to risk and, hence, to understand real needs.
The FSA said investor needs must be judged using methods that can be assessed externally. So out go ideas based on asking clients if they are happy to take risks or statements such as "emerging markets are risky ? so don't put more than 10% of your portfolio in them". In comes personal profiling with questions assessing your concerns over losses and what actions ? rather than what investments ? you consider to be more, or less, risky.
Research by Axa Wealth this week reveals that most people in Britain are deeply risk-averse, and much more keen to preserve any wealth they have than take a punt on stock market growth. Only one in 10 people thinks taking risks is "exciting" or "invigorating". Two thirds said risk-taking makes them feel "nervous" and "uneasy". Risk levels vary significantly between men and women ? and between partners.
"Someone in their late 20s saving for a pension has a different set of risks and time horizons than if they were saving for a property deposit," said Rob Gleeson at FE (formerly Financial Express), a firm which analyses investments and investors. "The pension buyer's risk is not having enough 40 years in the future so there is more risk in a portfolio of gilts and cash deposits than from equities. But for a homebuyer, it's the other way around."
Traditional measures of risk are based on volatility ? an institutional investment concept which Gleeson said is "not well suited to private investors who usually have a goal to reach, and are more worried about losing money."
Axa Wealth recommends that before taking any financial advice, individuals should take a long, hard look at their attitude to risk and weigh it up against the sorts of returns they are seeking from their savings.
But how do you weigh up your own risk profile? There are a number of tools both from specialist firms such as eValue and FinaMetrica. Product providers including Skandia, LV=, Fidelity and Zurich offer tests for advisers to use, although some of these are based on questions and research from psychometric specialists.
? Skandia ? download a PDF by entering "Skandia risk profile questionnaire" into a search engine. It's good on investment goals and capacity for loss. But you'll have to analyse the results yourself ? this is intended for financial advisers.
? Fidelity has a risk profiler and information at http://tinyurl.com/68nx6v5. You may need to click "professional adviser". This provides a model portfolio based on your answers. A number of advisers like this one ? it is easy to use and comes up with a pie chart that suggests suitable investment areas.
? FinaMetrica operates risk profiling services for lots of companies, but is not open to the public. However, after we contacted the company it agreed to make its profiling tool available free to Guardian Money readers ? go to www.riskprofiling.com/guardian.
You'll find questions with a psychometric feel to them and at the end ? it takes about 15 minutes ? you receive a "risk tolerance" score which indicates your willingness to take investment risks. When Guardian Money writers tested the system, it threw up intriguing results. Money editor Patrick Collinson scored 43, indicating a relatively low willingness to accept risk, while I scored 71, suggesting I am willing to take more investment risk than 97% of other people.
There are no overall solutions to assessing your individual risk levels, but these tests do at least indicate your comfort zone. And they may at least help you think about money ? rather than being led by product marketing.
Source: http://www.guardian.co.uk/money/2011/nov/25/investing-risk-willing-to-take
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