“However, if you have a small pot and big ambitions then higher risk investments might be necessary. That said, the client’s attitude towards investment risk and tolerance for loss must also be key considerations.”
It is likely an adviser will already have an idea of their client’s risk parameters, assuming they are a longstanding client.
Getting them to reiterate these when planning one of the most important parts of their lives is, therefore, crucial.
Risk parameters
Mr Gallacher points out in his experience most of his clients are somewhere between cautious and balanced in their attitude to investment risk, yet many “traditional” investment strategies are skewed to those with medium to higher risk tolerances, he notes.
“There’s a danger that people chase higher returns without being aware of, or able to stomach, higher risks and this approach is almost certain to end in tears when people panic during the inevitable downturns in the markets,” he cautions.
“We tend to construct well diversified portfolios for clients, trying to avoid over reliance on any one investment idea or area.”
Mr McGowan points out: "A multi-asset, life-styling approach to the accumulation stage offers the flexibility for clients to make the choices that best suit their individual needs – whether they’re taking an adventurous, balanced, or cautious approach, and whether they are targeting an annuity, cash distribution, or flexible access.
"As clients near their target retirement date, many might plan for a gradual rebalancing towards a lower-risk portfolio, although as advisers will be aware, that’s not always the case for everyone."
It can be a fairly common behaviour among some clients to shy away from risk at times when it is most appropriate to take more risk.
Henrietta Grimston, relationship manager at 7IM, argues that whether in the accumulation or decumulation phase, the underlying investment strategy or philosophy does not need to change.
“What needs to be assessed is attitude to risk, because whatever life stage clients are in, the level of risk taken will influence investment returns,” she reasons.
“One of the big challenges for many advisers is convincing older clients to take the right level of investment risk. Lots of people want to dial the risk right down as they reach retirement, yet that’s when their pot is at its biggest and the power of compounding is at its greatest.”
