When the words “portfolio”, “client” and “risk” are used in the same sentence, the topic of discussion is more than likely investment advice and investment management. Around the world, advisers routinely categorise investment funds based on established regulatory and industry norms and impart this analysis to their clients. For them, this is what identifying risk is all about. While this is not unexpected, the reality is that, globally, many financial advisers are, aside from providing investment advice, also involved in providing direction to clients in their purchases of other financial products, so the categorisation of risk with respect to their investments is only one aspect of risk management for any given client.
Risk is synonymous with danger and chance and suggests an uncertain outcome which can have pleasing or devastating consequences. Generally, people will be happy with a good outcome and unhappy with a bad outcome, but the degree to which they are happy to take a chance on exposing themselves to the possibility of a negative outcome and, subsequently, to live with it, must be a key consideration in any advice offered to a client. Understanding how a client will react to a possible negative outcome is a huge advantage to both adviser and client alike.
Indeed, after the medical profession, the advice of the financial services industry has the greatest capacity to bestow the most benefit or inflict the most damage on the lives of the people they serve. Perhaps the biggest failing that the financial services industry has is the lack of realisation that the real threat to client wealth creation lies not in markets but in the behaviour of the clients themselves.
This may come about through making investment decisions, borrowing too much or just spending blindly without any consideration for the future. Financial advisers are responsible for guiding their clients through the mass of data and financial news sources that exist. Such guidance requires the education of clients in the structured matching of their resources against their goals and aspirations in a manner which does not expose them to risks that they cannot tolerate, financially or emotionally.
Of particular relevance, but rarely considered, is the unconscious transference to clients of the adviser’s own attitude to risk and money. Advisers can, and do, have blind spots in allowing their own investment and financial preferences to overly influence a client’s decision-making process. Just because an adviser feels comfortable with taking risk does not excuse him from assuming that the client should have the same approach, even if a similar perceived approach by the client might exist. Likewise, an adviser’s approach to spending money, borrowing or bestowing trust can mask risk that might be present in specific financial products or a particular financial planning approach.
In a study of 91 USA pension funds for the period 1974-1983, investment policy decisions accounted for 93.6% of the total plan returns. This meant that decisions by investors at a strategic level rather than decisions by fund managers at a tactical level were the source of the actual investment returns. Such decisions were then and still are rooted in emotional responses and are driven by the behaviour of the individuals vested with the control decisions. These behaviours could, if handled poorly, result in badly executed decision processes that extend far beyond the impact of asset class investment returns.
What needs to be understood by clients and implemented by advisers is the requirement for a strong individual financial management and investment mandate process that is unswervingly applied to meet clients’ goals. By having all parties recognise their own emotional preferences and positioning them within the investment and financial product selection process, an adviser can not only be seen by their client to be far more engaged but also far more valuable than an adviser who focuses on product selection only. This, in turn, provides the foundation stone for a long-term profitable business relationship for both adviser and client.
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