The risk of risk 

For my latest Weekly Rant I address the subject of investment risk.  I recommend that you read the full article so make sure you check out Financial Adviser next week.  I’m not recommending this simply because I regard this particular ‘rant’ as particularly noteworthy, but because the implications affect every single financial adviser in the country. 

The subject of ‘risk’ has evolved dramatically over the last 10 years or so.  I do not believe that the standard texts for our benchmark level 4 qualifications go anywhere addressing the matter properly, and for the record I’m not saying that I’m especially knowledgeable on the subject either.  After all, I’ve only gone through the same learning process as all of you. 
  
Let me explain.  10 years ago, money in the bank would be eroded by inflation but there was no ‘risk’ attached to it.  Until Northern Rock went down the tubes that is.

Structured deposit products with AAA rated counterparties had very limited risk attached to them.  Until Lehman Brothers went down the tubes that is.

Ask an investment manager about derivatives and they regard them as essential risk-management tools and don’t see them as risky at all.  I mean, how many fund presentations have you been to when they trot out that the currency risk in that global equity fund has been fully hedged?

Yet read material from the regulator and derivatives are the spawn of the risk devil, to be avoided (mixing the metaphors somewhat) like the plague. 

Risk, we now know, is not just about the ups and downs of stockmarket investments.  There’s a whole range of components to the subject, and to the relatively comprehensive list that I used to use with my clients, I would now add ‘regulatory risk’.

You might that think that ValidPath’s file-checking was the most important arbiter of the quality of your advice.  But you’d be wrong.  In the end, whatever WE think, the judgement that matters most at the end of the day is the FOS judgement on the quality of your advice, should your client’s complaint get to their desk.

Which is why it is increasingly important to not just consider your own take on risk, which will affect the nature of the advice you give to your clients, nor even your client’s view on risk, which is going to affect how they respond to the investment outcomes they see, but also the regulator’s opinion on risk, which will affect whether they uphold a complaint or not.

And it’s increasingly obvious that their understanding is so divergent from anything you or I have ever learned or passed on to clients, that it simply cannot be ignored. 
 

Related Links

Why not take a look at our updated page on Risk Profiling?
Gill Cardy, 29/08/2014