Client Risk Profile

Question 1

What is capital risk?

Answer 1

o The risk than an investment may be worth less in future

Question 2

What risks are associated with investing in cash ?

Answer 2

 Inflation risk: future capital and income eroded by inflation
 Interest rate risk: interest rates change over time
 Shortfall risk: investment return falls short of the amount required for an investor to achieve their objectives

Question 3

What needs to be done to reduce risk when investing in terms of portfolio?

Answer 3

Diversification

Question 4

What three factors contribute into a clients risk profile? And what does risk profiling require of these?

Answer 4

• Risk required: level of risk associated with the return required
• Risk capacity: level of risk the client can afford to take
• Risk tolerance: level of risk the client is comfortable with

Risk profiling requires each of these three factors to be separately assessed

Question 5

in 2011 the FCA found widespread inadequacies in the UK advice process what was this review called?

Answer 5

RDR – retail distribution review (a review done to work out if information passed to clients is correct and contains relevant details)

Question 6

What were specific criticisms found in the Retail Distribution Review (RDR)

Answer 6

• Failure to collect/ account for all the information relevant to assessing the risk a customer is willing to take
• Relying on risk profiling/asset allocation tools
• Poor descriptions of attitudes to risk

Question 7

Aside from the major three what other factors might lead into a client’s risk profile?

Answer 7

o	Timescale of the investment 
o	Amount of risk capital 
o	Investment experience 
o	Psychology (attitude to risk) 
o     Examine a client's existing investment 
o     Risk profile questionnaire