This blog looks at the benefits of defining risk for advisers and their clients and how you can start doing so effectively in your advice process.
Over the last decade, there has been an increased focus on ensuring that the financial products advisers recommend are suitable for their clients and aligned with their risk profiles and circumstances. As such, defining risk has become even more integral to the advice process.
The role of risk in the advice process
Since 2011, when the FCA highlighted that suitability was a failure of many advice processes, risk profiling has become an important step in the advisory process. It’s necessary for assessing your client’s attitude to risk, and matching the most suitable investment products to meet their financial objectives for the risk level they are comfortable with.
Typically, advisers look at how clients’ funds are invested, then use their chosen methodology to risk assess their portfolios before comparing the result to the clients’ agreed level of risk. Ensuring that a client’s risk appetite, objectives and funds are all aligned is vital for delivering the most efficient financial outcomes.
What are the key benefits of defining risk in the advice process?
Defining risk is important for you and your clients in ensuring you have complete risk alignment and consistent advice suitable for meeting your clients’ goals. Here are the 3 key benefits of defining risk in your advice process.
1. Better client-adviser alignment
If you’re able to articulate your clients’ risk in such a way that accounts for their financial goals, capital and appetite for risk, you will be better equipped to serve them more efficiently. Not only will you have a more comprehensive view of your clients and their circumstances, but you’ll also be able to offer more holistic and relevant advice when it comes to their financial futures.
2. Improved advice suitability
More holistic and relevant advice invariably means more suitable financial product recommendations. Because product choice can impact clients’ goals in terms of cash flow and capacity for loss, efficient risk definition enables you to assess product suitability from an informed position and recommend the right product for their requirements and attitude to risk.
3. Client peace of mind
Taking your clients’ risk profiles and goals into account when offering financial advice helps you to ensure that their expectations are met as closely as possible. Setting the right expectations of their fund journey through proper risk assessment from the beginning will result in suitable advice and relevant products and solutions for clients that will reap results if adequately aligned with their risk profiles. This leads to increased client satisfaction and peace of mind, knowing their needs are prioritised correctly.
How do you go about defining risk in your advice process?
When starting to include risk definition in your advice process, there are a few key factors to keep in mind, specifically:
- Your clients’ objectives - particularly their growth or income goals and how long they may need to invest for to reach these goals
- The scale of risk you should be matching to your clients’ risk profiles
- The methodology for defining the risks of the proposed investments
- How the risk questionnaire you use has been created and tested
Considering the sophistication of today’s financial planning solutions regarding investment risk, selecting the best tools and keeping the above factors in mind will set you well on your way to efficiently defining risk for your clients.
How financial planning software can enhance your advice process for defining risk
Effective financial planning software benefits the advice process in many ways to help advisers offer the best possible advice to their clients whilst considering their risk levels. For example, software solutions can support the risk definition process by consistently getting results for clients and their investments. The tools also enable advisers to quickly and seamlessly calculate the risk rating of a portfolio of funds, factoring in client specifics.
If you’re exploring ways to improve your existing software stack to streamline your advice process, download our Guide to Modernising Your Financial Planning Advice Process & Technology for our insights
Empower your advice process with EVPro’s risk tools
EVPro, our end-to-end financial planning software solution, creates a simple and effective way to ensure your clients’ investment plans are suitable and meet their specific needs, empowering your advice process overall.
Consisting of five specifically-focused modules that can be combined in whichever way best suits your needs, EVPro helps advisers to define client risk in the following ways:
- Providing comprehensive risk assessment questionnaires for attitude to risk, knowledge and experience, ESG preferences and capacity for loss
- Calculating the risk profile of a fund consistently
- Creating a starting point for discussions on the importance of sustainable investing factors with clients
- Risk assessment of investments at portfolio, product and fund level
- Recording a separate and clear audit trail on knowledge and experience factors
- Recording the final capacity for loss level for use after soft factors and cash flow analysis
- Forecasts of potential portfolio returns
- Inclusion of changes in forecasts
Summary
Defining risk is an essential step in your advice process. Ensuring all of your clients’ circumstances are taken into account is crucial for ensuring your advice is suitable and consistent. Leveraging new technology and the capabilities of adviser software like EVPro to define risk for clients can set your firm apart, help you gain a competitive advantage and ensure your clients achieve their financial life goals.
If you’re unsure how to start leveraging adviser software to improve your advisory process, look at our handy checklist for Choosing the Best Financial Adviser Planning Software for Your Firm.
