

Discussing Investment Risk

When talking to clients, Financial Advis¬ers are required to consider investment risk. There are many risk profiling tools available for advisers to help under¬stand a client’s attitude to risk but what happens next?

When I joined the industry, understand¬ing risk was much easier than today.


In 2008 everything changed. Banks failed, Governments were under finan¬cial stress, Stock Markets fell. Do these events mean advisers should tell clients everything is high risk?

Banks are being recapitalised and in the European Union, Governments guarantee the first €100,000 of a bank deposit. Two caveats to this, the type of account; 1/ not all accounts carry the guarantee and 2/ the guarantee is by banking group, not individual bank. If a depositor has money in 2 banks but they are part of the same group, then only €100,000 is protected.

We are all feeling better about the strength and security of banks so that is the good news. What about the de¬posit rates we are being paid? Is there an inflation risk we should be con¬cerned with? If inflation is running at a rate greater than the deposit interest we are being paid, we are losing money in real terms aren’t we?

We have also seen Countries in finan¬cial difficulty and even being bailed out. Is it therefore always sensible to hold Government Bonds? What hap¬pens to bond values if interest rates rise? Is there a risk the value of Bonds would fall.

We have seen volatility in Equity mar¬kets with some large companies having financial difficulties. At the same time some companies are doing very well, are cash rich and are paying good divi¬dends. Regulators tell advisers we need to understand our client’s attitude to risk and provide solutions to our clients that match those attitudes. The regula¬tors do not yet tell us which asset class¬es represent high risks or low risks. Is it therefore good advice to tell a cautious investor to leave their money on de¬posit at a bank? Almost certainly not. How do we advise a client who wants no risk and a return in excess of infla¬tion? It’s not an easy job.


This article appeared in and was written by Michael Lohdi, Chairman of The Spectrum IFA Group