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Risk profiling and investment selection

Risk profiling and investment selection

Chris Morcom
Partner/Private Client Adviser
13 Sep 2016

Recently I had a discussion with an investment manager who was explaining the process of risk profiling that his organisation was undertaking to determine their board’s appetite for risk in respect to their investment strategy. This was to then be used to create parameters for their investment manager to follow for prospective investment selection.

My initial reaction was disbelief. Why would an investment committee use ‘appetite for risk’ as a key determinate for their investment selection? Surely the objectives of the organisation are more important?

The same applies for individuals and families. 

In Hewison Private Wealth’s experience advising high net worth individuals – peoples’ attitude to risk are correlated to loss aversion. When markets, particularly share markets, are rising strongly, appetite for risk tends to increase. Conversely, when markets are more volatile or prices are falling, appetite for risk tends to decrease. This is a natural human reaction. However, if acted upon, it can cause significant wealth destruction.

Investment selection should be outcome focused, driven by an investor’s short and long term objectives. This requires an advisor to have a comprehensive understanding of their client’s investment purpose, and in particular, what the investor hopes to achieve. The investment risks associated with trying to achieve those objectives should then be explored and understood by both advisor and investor.

If the investor is not comfortable with share market volatility or the risk of permanent capital loss inherent in the investment strategy, the investment strategy needs to then be adjusted, along with their objectives.

For example, someone’s objective might be to have a retirement income of $100,000 per annum.  However, that goal may be in conflict with another goal of passing on all assets as an inheritance upon that person’s death. The conflict would be greater for someone starting retirement with an asset balance of $800,000, and not being comfortable to invest more than 15 per cent of their assets in equities and property.

The following could be solutions for those in similar financial circumstances:

  1. Accept a lower income in retirement;
  2. Review their goal of leaving assets upon death, and be comfortable with the gradual drawdown of their assets;
  3. Continue working to build up a greater asset base that will be able to meet their objectives; or
  4. Take more investment risk to aim for a higher return, but be less comfortable with their investment strategy.

Of all these options, the last is least desirable and more likely to lead to conflict between the investor and their financial adviser. The anxiety of the investor will more likely rise when markets become volatile or negative, which could lead to them selling their investments at the wrong time.

How does Hewison Private Wealth manage investment risk?

Developing client investment strategies to achieve a person’s long and short term objectives is a fundamental part of the quality financial advice process. Without this understanding, the investment process is likely to be ineffective and a potential stimulator for anxiety.

At Hewison Private Wealth, we spend a significant amount of time with clients in order to gain a comprehensible understanding of their financial objectives prior to delivering appropriate investment advice. This is not a ‘tick a box’ approach, or process as clients continue to update and adjust their financial goals and life objectives along the way.

If you are concerned that your investments are not aligned with your objectives, then it is time to call Hewison Private Wealth.

Any financial product advice provided is general in nature. It does not consider your needs, financial situation or objectives. You should consider the appropriateness of this advice to your circumstances before you act on it.


Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.