When UK super brands issue profit warnings, it is time to

start talking investment risk?

When giant UK brands such as Tesco and Next announce profit warnings, investors suddenly want to talk about risk. According to recent research profit warnings by UK-listed firms have risen to their highest summer level in six years. The report, by the consultancy firm EY, said quoted firms issued 69 profit warnings in the third quarter of 2014, up from 56 in the same period in 2013. So what does this mean to investors? It means that the nerves set in. Particularly with those who invest their portfolios without using a Wealth Planner or with those who don’t have complete confidence that their current adviser understands their tolerance to investment losses.

The financial advice process and service that the consumer receives varies on the company or individual they chose to appoint to manage their financial affairs. Wealth Management and Financial Planning companies can take a very different approach to providing advice. At Sanlam we believe that understanding client tolerance to risk is fundamental to the advice process, but not every business shares our view.

When it comes to appointing a Wealth Planner, it can be hard to know you are making the right choice, to compare services on a like for like basis. Yet most clients want to achieve the same goals; to achieve the financial reward in a risk controlled environment, so when big brands hit the news headlines with profit warnings, there is no need to feel nervous. Rick Eling, Sanlam’s Head of Investment Solutions has identified key ways in which you can spot a Wealth Planner who adopts a good and modern risk profiling process.  

1. Look for evidence that your Wealth Planner examines risk tolerance, risk capacity and client objectives individually. They won’t just focus on one of them and won’t use a single set of questions to explore all three. They are separate factors.

2. Has a tested and scientific basis for assessing risk tolerance. This is a psychological construct requiring specialist skills to elicit meaningful responses from clients. Advisers who profess to “use their gut” to assess a client’s risk tolerance are deluding themselves and their clients.

3. Will explore risk capacity from several angles: the capacity to be a long-term investor in the first place (issues like emergency funds are relevant); the capacity to ride out short term market falls (this relates to how likely a client is to be forced to sell assets during a downturn to fund life needs); and the capacity to fail an investment goal (if this investment is your retirement plan then what will you do if markets don’t deliver as hoped?)

4. Will facilitate a detailed discussion around your objectives. This is too often overlooked by weaker advisers, who still focus on the sale of funds and products and not on their role as a life planner to the client. Modern risk-profilers are integrated with some form of economic/market model so that investment goals can be set in the context of real-world market expectations.

5. Will leave you fully understanding a.) how much investment risk they are taking b.) WHY they are taking it and why it’s necessary and c.) What good, average and poor markets will mean for their portfolio.

3. Will explore risk capacity from several angles: the capacity to be a long-term investor in the first place (issues like emergency funds are relevant); the capacity to ride out short term market falls (this relates to how likely a client is to be forced to sell assets during a downturn to fund life needs); and the capacity to fail an investment goal (if this investment is your retirement plan then what will you do if markets don’t deliver as hoped?)

4. Will facilitate a detailed discussion around your objectives. This is too often overlooked by weaker advisers, who still focus on the sale of funds and products and not on their role as a life planner to the client. Modern risk-profilers are integrated with some form of economic/market model so that investment goals can be set in the context of real-world market expectations.

5. Will leave you fully understanding a.) how much investment risk they are taking b.) WHY they are taking it and why it’s necessary and c.) What good, average and poor markets will mean for their portfolio.

This article is for information purposes and should not be treated as advice. Individual circumstances should always be considered prior to purchasing any financial products. For further information please contact your Wealth Planner.

Sanlam is a trading name of Sanlam Wealth Planning UK Ltd (Reg. in England 3879955) and English Mutual Ltd (Reg. in England 6685913). English Mutual Ltd is an appointed representative of Sanlam Wealth Planning UK Ltd which is authorised and regulated by the Financial Conduct Authority.

6. Will be able to plan separately for accumulation goals and decumulation goals.

7. Finally, the very best risk profiling processes integrate seamlessly with a range of risk-targeted portfolio solutions. There is no point in the adviser doing a good job on the risk-profiling using up-to-date tools if the end portfolio bears little or no relationship to the risk profile agreed upon.

8. “Risk advised” MUST EQUAL “risk invested”. This is where many, many advice processes still fall down. If you are worried about investment risk and would like to discuss your exposure to investment risk then speak to your financial planner. If you don’t have an appointed adviser, email Sanlam at letstalk@sanlam.co.uk