Assessing client capacity for loss is notoriously difficult. Here Caspar Rock, chief investment officer at investment company Architas, provides five top tips for advisers.
The tips follow a recent discussion on capacity for loss attended by the Association of Professional Financial Advisers (APFA) and Unbiased.co.uk
1. Capacity for loss should be considered as a distinct part of the fact find process, separately from attitude to risk.
2. Advisers should consider non-financial issues such as lifestyle and wellbeing, which may also impact a client's propensity to withstand losses.
3. Cashflow planning is a good way of demonstrating to consumers the effect of losses on their future financial situation.
Five tips when assessing client capacity for loss
4. Capacity for loss should be reviewed on a regular basis in the same way that attitude to risk is regularly considered.
5. Advisers should include specific reference to capacity for loss within any client correspondence regarding the client's investment choices.
These tips follow research from Architas suggesting half of advisers believe Financial Services Authority guidelines on capacity for loss need more clarification.
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