RISK PROFILING

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Risk, in terms of finance fundamentals, involves the chance an investment's actual return may differ from the expected return. Risk includes the possibility of losing some or all of the original investment.

However, risk is not inherently bad and does not need to be avoided totally. A fundamental idea in finance is the relationship between risk and return. The greater the amount of risk an investor is willing to take, the greater the potential return. Simply, investors need to be compensated for taking on additional risk.

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Risk Required

This refers to the level of risk required to be taken on investments to achieve the desired level of investment return

to meet the client’s goals. This expresses a direct correlation to a clients required level of return.

Risk Capacity

This refers to the level of investment risk or losses that a client could afford to take to achieve their goals.

Risk Tolerance

This is the level of risk a client is comfortable with taking to achieve their goals.

By assessing these aspects of “risk”, it allows advisers and clients to discuss what levels of risk clients need to take to achieve their investment goals, and whether they would be comfortable with the associated level of risk.

By engaging in this process, an investment profile is created. An individual’s risk and investment profile will affect the overall decision-making strategy and process. A risk profile is important for determining proper asset allocation in regards to an investment portfolio.