First of all, it is important to understand that the Oxford Risk Suitable Risk Level is not the same as an attitude to risk (or risk tolerance) score. They assess different aspects and should be used for distinct purposes. An attitude to risk/risk tolerance assessment measures an investor’s willingness to bear investment risk for the chance of achieving greater returns, yet we know that this isn’t the final answer for your client. If they have a high attitude to risk but spend more than they earn and have significant debts, then investing at a high-risk level is clearly not the appropriate choice for them.
But with a client who has a low attitude to risk, is investing at a low-risk level always the best approach?
Imagine your client is young. They have a good education, a well-paying job, spend far less than they earn, and have decades of saving and compounding ahead of them. Their human capital – the value of their future earnings – is considerable, and they are still in the early stages of wealth accumulation.
To suggest they should be placed in an 80% bond portfolio for the next 40+ years, simply because they are emotionally cautious, is misguided. Their Risk Capacity – the financial ability to take risk, based on time horizon, income, and reliance on investment assets – is substantial.
This is where the Oxford Risk Suitable Risk Level (SRL) comes into play. Calculating the SRL begins by measuring the investor’s risk tolerance, but afterwards, we assess their risk capacity and may adjust their SRL either up or down based on this capacity. If a client has high risk capacity, they may end up with a higher risk level than would be assumed. See this article for full details of how the SRL is calculated.
The SRL score can serve as the starting point for an enlightening conversation with your client about risk and return. A client may not instinctively associate with their score if it is higher than their risk tolerance, but that’s perfectly alright! You can review the balance sheet pages of their risk report to explain why their risk capacity is high (see this article for further guidance) and why they may be better placed in a higher-risk portfolio. And it is crucial for your client to understand what it actually means to be in a low/medium/high-risk portfolio before they can confidently make any decisions.
Ultimately, the final risk level remains a joint decision between you and your client, but with Oxford Risk’s comprehensive insights, you are equipped with more tools to help make the best decision.