Client Advisory, Risk Assessment, and Portfolio Planning
Advice begins with knowing the client
Suitability rests on documented facts: objectives, time horizon, liquidity needs, financial circumstances, existing holdings, tax position, and risk tolerance. Candidates must distinguish risk tolerance (willingness), risk capacity (ability to bear loss), and risk required (return needed to meet goals). Where these diverge, the more conservative constraint normally governs unless the client is fully informed and the gap is documented.
Planning concepts
- Asset allocation drives most return variability; strategic allocation sets long-term weights, tactical tilts adjust short term.
- Rebalancing restores target weights and enforces discipline.
- Diversification and correlation: assets that move together add little diversification.
- Capacity for loss and emergency reserve before investing.
- Risk profiling tools inform, but never replace, adviser judgement and client discussion.
- Concentration risk: employer stock and single-property exposure are classic traps.
Traps that appear in questions
- Accepting a questionnaire score without exploring capacity for loss.
- Recommending a long-horizon product for a short-horizon goal.
- Ignoring tax wrappers and the effect of charges on net outcomes.
- Assuming younger clients always have higher tolerance; tolerance is personal.
- Failing to document why a recommendation is suitable, especially where it departs from the model portfolio.
- Overlooking currency mismatch for clients with cross-border liabilities.
Rule of thumb
Write the suitability rationale in the client's own terms: goal, horizon, amount, risk, cost, and why this product beats the alternatives considered. If the rationale cannot be written, the advice is not yet defensible.
Worked example
A client needs funds in two years for a house deposit but scores as high tolerance and wants equities. Capacity for loss is low because the goal is fixed and near. Correct approach: prioritise the short horizon, hold suitable lower-volatility assets, and explain the trade-off in writing.