Financial advisers have faced a challenging few weeks, with global events creating uncertainty across bond and equity markets. Communicating what has happened, what might happen next, and what it all means is no small task.
March marked the third anniversary of Russia’s invasion of Ukraine, a fragile cease-fire in the Middle East, and ongoing uncertainty around international trade tariffs.
Added to this, austerity measures were announced in North America and the UK due to high government debt burdens. Rather than triggering a market sell-off, these events have resulted in stronger European and Baltic market performance at the expense of US equities.
US Treasury yields are now lower than at the start of the year, suggesting a potential shift in US economic growth expectations. Meanwhile, gold prices are rising (living up to the title of a previous article - 'Gold: The 6,000-year-old bubble') as some investors prepare for further negative news.
Against this backdrop, it’s no surprise that some clients may be asking, 'Where will it end?'
Rethinking risk: Beyond volatility
This brings us to the concept of risk and its inseparable partner, volatility.
Volatility is one of the most commonly used measures of risk in financial markets. It’s defined as the standard deviation from the average return over a given period. But for most clients, this technical definition is meaningless - and it doesn’t reflect their lived experience of risk.
Many risk mointoring also rely on Value at Risk (VaR), which expresses the probability of financial loss within a portfolio. While this may give advisers insight into diversification and asset exposure, it doesn’t always capture how clients feel about risk.
For some clients, the real risk isn’t temporary volatility, it’s the possibility of a permanent capital loss. Others may feel more anxious about the ups and downs along the way, even if they’re comfortable with the long-term objective.
This highlights an important truth: Risk is personal.
The personal nature of risk
Risk isn’t a one-size-fits-all concept. Each client’s perception of risk is shaped by their life experiences, emotions, biases, and financial knowledge.
Two clients with similar financial circumstances might have very different reactions to market volatility because they view risk through different lenses.
This is why it’s so important for advisers to capture 'soft facts' when creating client risk profiles. These soft facts go beyond the numbers to document a client’s emotions, experiences, and personal views on risk.
By understanding these deeper factors, advisers can offer investment solutions that align not just with a client’s financial goals, but also with their emotional comfort level.
Practical tips for personalising risk discussions
Here are some practical ways advisers can improve their risk conversations and better align investment recommendations with clients’ true risk tolerance:
1. Ask the right questions:
Go beyond standard risk questionnaires by asking open- ended questions that reveal how clients really feel about risk. For example:
- ‘Do you follow financial news?’
- 'How did you react during the last market downturn?'
- 'What are your biggest financial fears?'
- 'How comfortable are you with short-term market concerns and staying invested to meet your long-term investment goals?'
2. Explain risk in real-life scenarios
Help clients understand risk by illustrating real-life scenarios. For example, show how a portfolio might perform during a market downturn and explain the strategies in place to protect their capital.
3. Document soft facts in the risk profile
Make sure to document any insights gained from your conversations in the client’s risk profile. This can help demonstrate that the recommended investment solution is based on a holistic understanding of the client’s risk tolerance.
4. Education support
Some clients may wish to gain a greater understanding of investment risks. Offering support and discussing behavioral finance to help clients identify when human emotion might take over and biases we all can exhibit.
Conclusion: Treating risk as a personal consideration
Ultimately, risk is not just a technical measure - it’s a personal journey
By taking the time to understand each client’s unique views on risk, advisers can build stronger relationships, improve client satisfaction, and deliver investment solutions that truly align with clients’ goals and comfort levels.
How we can help
The following tools are available for threesixty clients:
- Risk profiling tools - threesixty research has conducted a comparison of the leading risk profiling tools, analysing how they assess clients’ attitudes to risk.
- Fund research - threesixty fund research uses ratio analysis to assess downside risk, evaluating the unit risk for returns achieved above risk-free rates or benchmark returns.
We also monitor funds across discrete time periods to highlight manager consistency in managing portfolio risk. - DD|hub - DD|hub provides an alternative approach to risk- return-based investment appraisal.
By assessing the due diligence of investment propositions, the underlying assets, and the approach to portfolio construction, advisers can better identify the risks and benefits to managing capital loss.
This also helps evaluate whether a fund manager is offering a differentiated proposition, to existing funds and whether the portfolio is likely to deliver diversified investment risk.
If you require any further information about our product and fund research, or DD|hub, contact our research team.
