Today, investors demand much more attention and resource on risk management considerations and issues related to their investment approach, selections and, decisions.
In some markets, this is also becoming a regulatory requirement and hence, a new world with regards to risk management.
Segmenting clients by risk profile and creating suitable investment portfolios that align with their profile is something that wealth and discretionary fund managers have been doing for a long time. However, it is a constantly evolving and increasingly sophisticated discipline.
We know that advisers play a key role in helping their clients define their return expectations based on their risk appetite. This requires the consideration of several factors, including the clients’ capacity to absorb losses and their level of comfort with investing in financial markets.
Understanding of risk is key
Attention, then, turns to the selection of an appropriate investment solution that will grow the clients’ wealth over time in a manner consistent with their objectives and appetite for risk, or individual risk profile. An understanding of risk is key to helping an adviser select the most appropriate investment strategy. The key to this selection process is the adviser’s understanding of how to map specific investment products and solutions to key risk and return objectives.
To enable advisers to gain this understanding requires detailed information and transparency from asset managers on their investment management approach, including asset allocation assumptions and their long-term risk and return framework.
For asset managers to do this robustly, that is to say scientifically, requires considerable research capabilities and ongoing resource to ensure investment portfolios allocated to clients based on their attitude to risk contain a suitable mix of assets in appropriate proportions. In this way, the volatility and return profile of the investments should be kept within targeted ranges identified as giving clients the best chance of achieving their investment goals.
