Managing risk: The challenge of client education

Managing risk: The challenge of client education

According to a recent survey, the biggest challenge for financial advisers when managing risk is client education. This can be a problem when developing portfolios for clients, and advisers need to offer the right education and information to clients and carry out appropriate risk profiling.

Concerns from advisers

The research, conducted by Wellian Investment Solutions, found that nearly 80 per cent of advisers thought developing appropriate risk profiling questionnaires and offering the right information to clients were their greatest challenges to risk management.

Additionally, about half of them were concerned about the number of safe options that were available for clients’ investments. Some of the other main concerns that were raised included an over-reliance on the Chinese market and equities, which have resulted in more advisers reverting to discretionary fund management (DFM) services.

Managing risk

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When advisers are looking for a risk management solution, they need to consider what the level of risk is and ensure that clients are fully aware of the implications. Many of the issues that arise between advisers and clients occur because the clients feels their money has been invested incorrectly. Global regulators see risk profiling disputes as one of the most common complaints from clients.

Explaining the risks

There are tools and software for IFAs that can be used to educate clients on the risk that they are taking with their investments. By using risk profiling tools such as the software available at the Intelliflo website, financial companies can have a solution that is consistent across the board. These tools are generally based on a questionnaire format, which assesses the risk based on a certain portfolio.

There are issues with this process, especially if the client doesn’t just have one attitude toward the risk. A profiling tool will have a rather blunt view of the investment, which will be focussed on a set of assumptions, but it does enable advisers to have a documented outcome that they can discuss with their client. The adviser should highlight any inconsistencies that have arisen and amend or agree the portfolio with their client.

Completing this process will help to solve the issue of client education and reduce the level of risk that they are open to. No investment portfolio can ever be risk-free, but with clear and consistent advice, advisers can ensure their clients receive the best possible information.

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