Download - Assessing risk and the role of cashflows
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Risk & cash flows Richard Allum, Moneyscope
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What the FSA said
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Inadequate account of…
capacity for loss
The “problem”
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Lack of understanding
Standard deviation & volatility
Poor question & answer options
Monitoring & management information
Over reliance on tools
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Capacity for loss
Robust, repeatable process
Tools are start of the discussion
Other risk factors
Adjust & tailor results
The solution
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Education Education Education
The solution
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Hold in depth discussions
Separate processes
Full understanding of all risks
Explain in different ways
Education
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Education
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What is risk?
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What is risk?
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What is risk?
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Inflation
Liquidity
Lack of diversification
Product structure
Counterparty risk
Dying at the wrong time
Types of risk
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Losses more important than gains
Gains measured in %
Losses measured in ££
Investor regret
Sheep mentality
Behaviour & emotions
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Behaviour & emotions
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Ask the client
Compare to results from tool(s)
Show examples
Agree suitability
Select strategy
Document & review
Robust process
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Don’t rely on tools
Risk & loss are different
What level of risk is needed?
Minimum return required
Is extra risk worth it?
Informed approach
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Plan on target
Too much money
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Unsuitable assumptions
Running out of money
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Cash flow tools
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Bob is 61
£100,000 current savings
Just retired
“Balanced” risk profile
Lifestyle cost of £50,000 per year
Case study
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Current situation
-300,000
-200,000
-100,000
0
100,000
200,000
300,000
400,000
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£ In
vest
men
t C
apita
l
Bob's Age
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Inform & adapt
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Current situation
0
50,000
100,000
150,000
200,000
250,000
300,000
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
£ In
vest
men
t C
apita
l
Bob's Age
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Are your clients invested consistent with:
Their risk tolerance
Their capacity for loss
Future spending needs?
Consistency & suitability
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“We took risks, we knew we took them; things have come out against us, and therefore we have no cause for complaint.”
Informed client
Robert Falcon Scott