RISK profiling describes an adviser's responsibility to assess and agree each individual client's attitude to investment risk.

This is not as easy as it may seem. In practice, ask anyone how prepared they are to take a risk with their money and they will usually say not at all. Ask the same person if they want above average returns and they will say "yes" without even recognising the paradox.

Independent Financial Advisers are increasingly relying upon narrative approaches to risk profiling and this involves describing typical investment scenarios to clients and asking them for their reactions.

For example, if due to stock market falls the value of your investment was suddenly reduced by 20 per cent, would you a) surrender and cut your losses, b) do nothing and wait for a recovery or c) identify a buying opportunity and invest more?

A client who chose option b could then be defined as realistic investor on the understanding that they "would like to ensure their short-term financial security through low-risk investment, but also wish to benefit from long-term investment returns to provide for future security and can accept increased short-term volatility".

Time can make a difference to a client's risk attitude. Someone who has more time to invest over, say ten years or more, is in a position to accept an otherwise higher level of volatility, and therefore risk.

Similarly, a client who demonstrates a cautious attitude has to be made aware of the "inflation risk" they are running, that is to say that without growth in excess of the rate of inflation ("the real rate of return"), the buying-power of their capital will reduce over time.

The amount of money available for investment may also affect an investor's risk attitude as it enables a more balanced approach to be adopted with a range of risk levels across the whole portfolio.

However, few clients are either this fortunate or that speculative and, generally speaking, the crucial role of a professional adviser is to manage the client's realistic expectations by explaining fully, and in a manner that is easily understood, all of the implications of any proposed course of action.

Tel 01904 630333Fax 01904 632333

Email: david.holbrook@hallmark-ifa.com www.hallmark-ifa.com

Updated: 09:36 Tuesday, June 01, 2004