Investment Risk and Capacity for Loss Process

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1 Investment Risk and Capacity for Loss Process Understanding a client s risk profile and capacity for loss is a key part of our service and we need to ensure that any recommendation meets certain criteria to match their expectations of risk versus reward. Quite simply there is no such thing as risk free so it is our aim to explain what choices there are so that the potential behaviour of different assets can be matched to the objective. The initial point of contact and Fact Finding meeting will touch on investment risk as a general indication of an individual s overall position in consideration of their financial position and experience of investment. When it comes to the specific goal to be achieved the investment risk profile will be fine tuned and take other factors into account such as time horizon. For example, someone may have substantial assets in deposit accounts with an overall profile of Risk Adverse or Cautious whereas they might desire to expose a small proportion of their assets to stock market related investments which will extend the risk to a higher rating. We appreciate that there are numerous types of investment, a vast array of investment funds and solutions in the market place today. With a commitment to being Independent, we will consider the full range of retail investment products to come up with the most appropriate choice. This firm does not advocate having a set of bespoke model portfolios to cater for each risk profile. Using risk profile portfolios can be appropriate and where this is the case risk profile strategies may be used to match in with the offerings of a recommended product provider. In keeping with our role as Independent advisers, we need to keep abreast of all of the relevant investments and solutions available. These change on a regular basis therefore offering model portfolios as the staple investment solution may deny our clients more appropriate solutions. For example, over recent years there have been developments with guaranteed type products, which can be appropriate for certain clients. Each individual adviser has a wealth of experience and knowledge but may not always select the same solutions as each other. One particular investment solution may be as appropriate as another but we encourage a degree of autonomy for the individual adviser to make a suitable recommendation. Regular meetings are held within the firm to discuss investment offerings. In this way we can consider ourselves to be progressive and open minded as to what solutions will be appropriate at any particular time for our clients. Capacity for loss is assessed within the risk questionnaire and in more detail in discussion with the adviser. A complete loss of an investment is something the vast majority of people, if not all, will not entertain but fluctuations in values may be acceptable by some.

2 Stages of the Investment Process Stage 1 An initial meeting and compilation of a Fact Find which includes an overall indication of risk. Stage 2 Objective specific Attitude To Risk (ATR) Questionnaire. This provides a computer generated risk profile taking account risk and time horizon. Stage 3 The result then produces an ATR profile and Asset Allocation spreadsheet. Stage 4 The adviser will make any recommendations using the Financial Express Analytics Asset Allocation tool to reflect the individual s ATR. For specific matching of the asset allocation and selection of funds, the adviser will use the internal list of preferred funds in accordance with the firm s regular quarterly research (*refer below) Alternatively the adviser can make recommendations for funds which are a broad reflection of the ATR. Where appropriate an adviser can override the asset allocation model by taking into account other assets held by the investor or as a replacement of an asset class such as near cash instruments/lower risk assets instead of cash. Stage 5 Ongoing reviews will monitor and re-evaluate ATR as well as assessing the investment solutions to ensure their continued suitability. * The filter applied using the FE Analytics tool are: FE Crown Rating of 3 Crowns and Over Performance Ranking of at least 2 nd Quartile over past 1 year Performance Ranking of at least 2 nd Quartile over past 2 years Performance Ranking of at least 2 nd Quartile over past 3 years Manager Tenure of at least 3 years Fund Size of at least 10 million

3 Understanding investment risk What is investment risk? You can't plan financially without understanding investment risk. Many people, when they hear about 'risk', think automatically about the chance of being defrauded or not getting all their money back. This 'capital' risk is important, but it isn't the only type. Other types of risk involve uncertainty and unpredictability. When you make an investment, it can be difficult to say with any certainty what you'll get back when you finally cash it in. Share prices fluctuate, interest rates vary and inflation is a risk too. Just concentrating on capital risk and ignoring these other risks can mean you take too cautious an approach. Understanding risk means identifying your own attitude towards it and identifying the different types of risk. Then you can pick up tips for minimising the chances of things going wrong.

4 Investment risk of different types of assets There are a number of different asset classes that you can invest in, each of which come with their own risks. The four main asset classes are cash, bonds, property and stocks and shares (equities). Cash Cash is the least risky of the four but it tends to deliver low returns, which means the value of your money can be eroded in times of high inflation. Bonds One step up the risk ladder is government bonds, or gilts, followed by investment grade corporate bonds, where you effectively lend money to large companies in exchange for a fixed-rate of interest. Property Investing in commercial property, such as offices, supermarkets and warehouses, can grow your money through rental income and growth in the value of the property you own. The following risk warnings are applicable to direct investment into property: Equities It may be difficult to sell or realise the investment, or obtain information about its value, or the extent of the risks to which it is exposed. The value of property investments and income from them can go down as well as up and investors may not get back the amount originally invested. As property is a specialist sector it can be volatile in adverse market conditions, there could be delays in realising the investment. Property valuation is a matter of judgment by an independent valuer therefore it is generally a matter of opinion rather than fact. Past performance is not a guide to future performance and should not be used to assess the risk associated with the investment. The value of investments and income derived from them may go down as well as up. Investors may not get back the full amount of their investment and are not certain to make a profit, they may make a loss. The value of investments can fall as well as rise and past performance is not a guide to the future. It may be difficult or impossible to realise an investment in the fund because the underlying property concerned may not be readily saleable. The value of property investments and income from them can go down as well as up and investors may not get back the amount originally invested. As property is a specialist sector it can be volatile in adverse market conditions, there could be delays in realising the investment. Property valuation is a matter of judgment by an independent valuer therefore it is generally a matter of opinion rather than fact. Stocks and shares, commonly known as equities, are seen as the most risky asset class, as stock markets can be highly unpredictable. Investing in UK equities is considered as lower risk than US equities, while emerging markets (such as India, China or Brazil) equities are viewed as the highest risk as the companies you are investing in are less well known. Investment risk - simple rules to follow The greater return you want, the more risk you'll usually have to accept

5 The more risk you take with your investments, the greater the chance of losing some or all of your initial investment (your capital) If you're saving over the short-term it's wise not to take much capital risk. So what you are investing for and when you'll need access to your money will have a big impact on what types of investments are right for you If you are investing for the long-term you can afford to take more risk as your money has more time to recover from falls in the markets Investing in share-based assets has historically proved to be the best way for providing growth that outstrips inflation. There is a risk attached but, when you invest over the long-term, there is more time to recover your losses after a fall in the stock market Deciding your attitude to investment risk Your own attitude to risk is crucial. Some people are happy to live with capital risk if it means the chance of a higher return in the end. Others are 'risk averse' and don't want to risk their capital under any circumstances, while many will sit somewhere in the middle. Only you can judge what level of risk you feel comfortable with and you should think seriously about whether you can afford to lose money or lock it away for a sustained period. All investment carries a degree of risk so you should never invest more than you can afford to lose. Building a portfolio to suit your level of risk To work out your own risk tolerance you should think about how much money you could face losing without it having a negative impact on your lifestyle or emotional state. Before investing you need to work out how you would cope if your investments fell by 10%, 30% or 50%, and then you can set a limit for yourself. How long to invest You may have a different attitude for different types of investments. For example you might be happy to take some risk with money you won't need access to for many years but if you are also saving up for something over just a few years, you'll need to be much more cautious.

6 Your risk tolerance is always linked to your investment timeframe. If you are investing on a short-term basis (less than five years) then you need to be prepared to accept more risk because if the value of your investment falls you will only have a limited time for it to recover so you can break even. The longer you have to invest, then the more able you will be to withstand short-term losses and see the value of your investment recover. However, it can take a long time for that recovery to happen and stock markets will always have bad years as well as good ones. The guidance provided is for information purposes only and does not constitute financial advice or a recommendation of a suitable investment strategy, clients should seek independent financial advice to the suitability any investments in relation to their individual circumstance before embarking on any course of action.