In recent years, many investors have lost up to 25% or more of their portfolios.
No wonder some of them wanted to speak with their wealth managers; these conversations should inevitably lead to a discussion about risk.
If investors weren’t taking risk seriously before, they sure are now, and investors should take the opportunity to discuss risk with their wealth managers again.
We asked a few seasoned managers about the most effective ways they know to discuss risk.
How do you explain risk?
“We really talk about how much investors are willing to lose to achieve their goals. One exercise we take clients through is ‘the boat is sinking’ question: How low will you allow the boat to sink before you jump? With $1-million would you jump after losing $30,000 (or 3%) or $100,000 (10%) or $500,000 (50%) or somewhere in between? “
– Brian Wruk, certified financial planner, Transition Financial Advisors in Alberta.
“I think the first issue is seeing how the clients define risk for themselves. It’s not up to me to define it. We provide them with the definitions and ask them to rank the risks—longevity, market volatility, disability—based on their own lives, so we can understand them better. From there, we can decide on a plan.”
– David Wm. Brown, certified financial planner, Al G. Brown and Associates in Toronto.
“Clients have come to understand risk as: How far can my portfolio fall in value before I really start to worry? We have to factor that into our perspective and ask if the client has the time and the psychological fortitude to make up for any losses. If not, their tolerance for risk may be lower than expected and capital preservation becomes the focus for the portfolio.”
– Cynthia Kett, a chartered accountant and certified financial planner with advice-only firm Stewart & Kett Financial Advisors Inc. in Toronto.
“We tend to focus on the very big picture. First we ask what risk means to them. We spend a lot of time using questionnaires and surveys to pinpoint their risk personality. Then I talk about what we think risk means. In general, it means not being able to accomplish what you want to (goals), whether we’re talking about work, family or financial goals. It’s about their vision [and how different risks will impact that vision]. We spend a lot of time talking about that.”
– David Luke, a certified financial planner with Wellington West Financial Services Inc. in Manitoba.
