New adviser tool launches to help assess investment risk

by NZ Adviser03 May 2017
Pocket Risk launched in New Zealand yesterday, a risk assessment tool to help financial advisers assess the appropriate amount of risk to take in their clients investments.

The London-based company has been working with advisers in the US and UK for over four years and has also reached Canada, Australia and India.

Speaking to NZ Adviser, founder and CEO of Pocket Risk, John Ndege explained they chose to launch in New Zealand now as advisers here had been asking after its availability. He added that the Financial Markets Authority had recently raised the issue in its Strategic Risk Outlook 2017 and that advisers want to be compliant.

The FMA stated in its report that, “Investor understanding is an essential part of healthy financial markets. Our 2015 survey focusing on the ‘over fifties’ showed New Zealanders have low levels of understanding about basic investment concepts such as risk, return and diversification”, with only one quarter of respondents being aware of their tolerance for risk. 

“Low investor capability and gaps in investment knowledge are also significant drivers of risk. This driver of risk reduces when investors receive clear communication about the risks of financial products,” it stated. 

With house prices at record highs, Ndege says it’s important that people know whether they are appropriately positioned to handle a fall and for advisers to find out if their client's investments match their risk tolerance. 

“The danger of an inaccurate risk assessment is choosing unsuitable investments,” said Ndege. “This can result in clients losing substantial sums of money and having to work extra years to make up for it. A wrong assessment can kill a client's retirement dream.

Ndege says the FMA findings indicate a need for improved client education. “An advisor's job is not simply to build a financial plan but to explain it to a client so they will stick with it. This requires an understanding of investment risk.” 

According to Ndege, Pocket Risk’s questionnaire stands apart from other risk assessment tools because it takes into account not only risk tolerance, but the client’s goals, their risk capacity (the amount of risk they can afford to take based on savings and income) and behavioural biases.

He says a key problem for advisers is getting the right amount of risk. “Financial plans don't work if people don't stick to the plan. To get people to stick with the plan you need the right amount risk. If you have too much risk, the client will bail when markets drop. Too little risk and the client won't make enough money to achieve their goals. 

“It's a fine balance. If advisers only look at the psychological side of risk, they could miss the client's financial situation (income, assets, job security), long-term goals and behavioural biases which also need to be assessed for a complete plan.”  

Pocket Risk is tested on a sample of investors to ensure the assessment of risk is accurate. “This is a continuous process, to ensure the reliability and validity of our solution.”

Find out more about Pocket Risk at www.pocketrisk.com.

COMMENTS

Most Read

NZ Adviser TV