One of the most important jobs of a financial adviser is to help their clients appreciate the existence of and then put in place reasonable measures to deal with risk. Financial risk.

An essential part of that process in relation to making investments is, no surprises here, the risk assessment, to clarify the investors “attitude to risk”.

It is generally accepted that investors should be encouraged to consider risk in two ways.

• Your ability or capacity to take risk. This is all about your financial circumstances and goals. If you have more wealth and can invest over longer periods, you may be more able to accept a higher degree of risk.
• Your attitude or willingness to take risk. This is more of a mental approach. Some people may not be able to sleep at night at the thought that their investment can fall in value rather than rise.

Both of these aspects ought to be discussed through the risk assessment .

Almost inevitably, many of these risk assessments result in the investor being categorised as being a  “medium risk” investor .

A typical description of this type of investor might be as follows:

• “The opportunity to achieve attractive returns (for growth or income needs) is very important to you but you also want to invest in a way that does not expose all of your capital to more riskier investments. You have some experience in taking investment risks and accept this is necessary to achieve potential returns much higher than those available from cash deposits. You understand that this could involve your capital being invested for five years or more with medium to medium high exposure to stocks and shares and other more riskier investments.
• You understand that the value of any investments you make will fluctuate and you might get back less (or more) than you invested (at maturity or earlier).”

Typically, investors would be regularly re-assessed to determine if their attitude to risk had changed.

It occurs to me  that this process of risk assessment should be more frequently extended to the owners of SMEs who (implicitly or explicitly are relying on their business as their pension) and potential “Nevertirees” (those who are , through choice, likely to continue working in whatever capacity) to encourage them assess or  re-assess the risk that might be inherent in their plans.

The underlying assumption for these people (that they, through continued working or their business will continue to supply sufficient income to deliver an acceptable/desirable lifestyle) must be accepted as carrying some level of risk. But first they need to appreciate that through their actions they are , in effect, making important investment decisions . It’s just that they won’t feel like they are.

In many cases , such individuals  through a traditional risk assessment in connection with say an investment of available money, may be categorised as  “medium risk”. However, in relation to what they are doing through reliance on their business (in effect a single unquoted, illiquid private equity) or reliance on themselves being able to continue to deliver a required level of income, they would be more appropriately categorised as “High Risk” .

If the adviser, in a non confrontational and professional way can get the client to appreciate this then the anxiety necessary for action to result may be generated.

It is likely though, that the client who is relying on their business doesn’t feel like they are taking a high risk by doing so. That’s probably because when they go into work it doesn’t feel like they are making an investment – they are just doing what they do. Making them appreciate the risk and then re-appraising and if necessary adjusting their financial plans in the light of this will be a fundamentally important achievement for the adviser.

While getting risk onto the agenda for many would be “nevertirees” will be essential, it will in many cases be entirely reasonable to assume that some continued income flow will result from their endeavours. And this can be factored into planning to determine what the likely gap will be between what they want to achieve as a future income and what they will based on their current planning – taking account of the risk that the “best case” (eg the continuation of current income at it’s current level will continue forever) may not be what happens in reality. By embracing, with appropriate caution built in, the likelihood that some income from endeavour or business will continue, the future income goal will appear more reasonable. And planning can proceed from this base. In effect  the individual and their adviser will have realised and accepted they they and/or their business is an asset class and through application of their “true” assessed attitude to risk, it will make some sense to add some diversification to the financial plan. This should also include appropriate life and income protection insurance. After all is not reasonable to include the impact of death or serious illness in our risk assessment?

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