Are you being offered the right investment advice?

Finding a financial advisor you are comfortable with is hard enough, but how can you be certain they are offering you the most accurate advice possible?

Gillan Williams
Author Gillan Williams
Date 28th September 2016

Has your financial adviser assessed your risk suitability

One way of being sure is by discussing your Risk Suitability. This vital element of a comprehensive investment risk assessment is often overlooked, leading to inaccurate investment advice.

What is Risk Suitability? Essentially, it is the proper measurement and analysis of which level of risk is right for you. Understanding Risk tolerance (how you respond to changes in your investment value) and Risk Capacity (how much risk you can afford to take) is very important, but without reviewing this element of your risk assessment, it is not possible to align your risk personality with an investment portfolio that can deliver your preferred return, at an acceptable volatility range.

For example, you may be comfortable with an investment option that features 5% volatility. One might assume that all investment options that offer the same level of fluctuation would be an appropriate investment. However, this is not true, and other factors need to be considered.

One such factor that Risk Suitability assesses, is time. Different investments mature at different times, so understanding the timescale of your investment and when it is likely to deliver a suitable performance at an acceptable level of risk, is imperative.

Another important aspect is the implicit level of reward of each investment. Some alternatives will have the same volatility, for example the 5% above, but carry different expectations of the reward the investments can achieve. Understanding how a given set of investments, with their specific risk/reward assumptions, are suitable for you is critical to making informed investment decisions.

The hard truth is that without factoring Risk Suitability, with these and other nuances, it is not possible to accurately determine which investments are most suitable for you.

Fortunately there are many wealth managers, retail banks and IFAs that cover this as part of their investor risk analysis. Talk you your advisor today to better understand the importance of Risk Suitability.

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