Risk Appetite

We all have a propensity to take risk; managing hazards on a daily base is something we all do simply evidenced by the fact that we get out of bed, leave the house, drive, walk, interact with people we don’t know - it is hard wired within us in order survive whatever life throws at us. Some of us will inherently avoid risk whilst other seek it out – governed by their ‘risk appetite’. That is why so few of the world’s population skydive, bungee jump or play the stock market. Different things both internal and external influence our risk raking behaviour.

The Financial Conduct Authority requires financial advisors to assess the risk appetite of clients before selecting products for them. For those who have experienced it, the quality and depth of that assessment is varied, and whether or not it is robust or has rigor, is debatable. After all, financial advisors are not trained psychologists and there is a degree of subjectivity in all risk assessment processes!

A key element of the relationship between the advisor and investor is trust. For many investors, there will be insufficient engagement with an advisor over time to build a relationship within which familiarity and trust develop in any meaningful way. As the saying goes – “trust takes years to develop and seconds to destroy”. One should never forget that the financial advisor is in essence a salesman, making a living out of the commission on product sales. The more they sell, the wealthier they become and whilst there may be a world of difference between a mortgage broker and a hedge fund manager both are inevitably taking risk with other people’s money. Jordan Belfort’s own view that his “debauched life of sex and drugs was ‘even worse’ than shown in the film “Wolf of Wall Street”. To what extent does reward-driven financial risk taking become more than just a way of life – an addiction – the thrill associated with higher risk higher reward? A legitimate question therefore is, who assesses and controls the risk appetite of financial advisors and how can those who manage and regulate them demonstrate their trustworthiness to the client or investor?

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