AFA urges focus on risk tolerance

The processes of the Ripoll Inquiry and the global financial crisis have driven home the need for financial planners to fully understand the risk tolerance of their clients, according to Association of Financial Advisers (AFA) chief executive Richard Klipin.

Klipin has told Money Management that the AFA has found that advisers who clearly understand their clients’ tolerance for risk and who implement strategies strictly in accordance with that risk tolerance had happier clients and more robust planning businesses.

“Because risk underpins all of a client’s needs and financial aspirations, it must become a fundamental discussion with each and every client,” he said.

Klipin said advisers had to also consider whether or not a client’s attitude to risk changed according to market conditions.

“What some advisers have found in the wake of the [global financial crisis] is that clients whose risk profiles previously indicated they had a high tolerance for risk are now indicating a much lower tolerance,” he said. “The question needs to be asked whether appetite for risk can change according to market conditions. If so, that has obvious and very important implications for advisers.”