An investor has high risk capacity when their investible assets (cash, investment and pensions accounts) are worth less than their non-investible assets (property, business assets, etc.) and/or their net future cashflows. In other words, someone who owns their own home and has many years of accumulation ahead of them will have higher risk capacity than someone with a large mortgage who is living off savings.
If you are not sure why your client has been given a high risk capacity score, you might want to review the following.
The client’s income has no end date, or that end date is very far in the future.
Clients who are accumulating wealth will have higher risk capacity than clients who are nearing or in retirement. Check that your client’s projected retirement date is entered as the end date on their income, or use another relevant end date, to ensure an accurate result.
The client’s expenditure has not been captured fully.
Risk capacity is calculated using the net future cashflows, so entering accurate expenditure is important. You don’t need to capture every detail, but make sure that the most important cashflows are properly estimated and have sensible start and end dates.
The client owns valuable non-investible assets.
Non-investible assets, such as properties, contribute to risk capacity. Despite non-investible assets being outside the investment allocation discussion, they are still able to be sold or borrowed against should it be needed. How strongly these assets contribute to risk capacity can be controlled through the “willingness to sell” option, but even an asset that a client is unwilling to sell will contribute to risk capacity. If a client cannot sell or borrow against the assets, it may be appropriate to omit this asset from the risk capacity calculation altogether.
The client’s mortgage (or other debt) has not been captured.
Risk capacity is calculated using the net value of the non-investible assets, so make sure that any mortgages or other debts have been accurately captured by the tool.
The client’s investible assets are much smaller than their other assets and/or net cashflows.
Risk capacity is the ratio of a client’s investible assets compared to their total wealth position. Therefore, if a client is investing a relatively small amount compared to their non-investible assets and/or their net cashflows, their risk capacity is likely to be high. For example, consider two clients who own properties worth £500,000 and are comfortably saving £5,000 each month:
- Client A is looking to invest £500,000
- Client B is looking to invest £5,000