Risks Understood
Updated
Risks Understood is a Driver of Elevation Goal 3: Safeguarding clients’ best interests, mitigating risk
Data based on responses to the following question, asked in the Verified Client review form
“How confident are you that you understand the potential disadvantages of [adviser]’s recommendations?”
Possible responses
- The potential disadvantages were not pointed out or explained to me
- I have some understanding but would have preferred more clarity before making my decision
- I have enough understanding to be confident in my decision
- I couldn’t be more confident I understand the potential disadvantages
Risks Understood Score
Proportion of respondents answering "I have some understanding but would have preferred more clarity before making my decision", “I have enough understanding to be confident in my decision” or “I couldn’t be more confident I understand the potential disadvantages”
Distribution of responses to Risks Understood
Clients understanding of risk was a key risk area arising from our qualitative research with advice firms and advisers.
How to improve your score:
Visualise potential issues
Connect to events. To help them visualise, you can use events your client will remember as examples of what could happen in the future:
2000 – Dot-com bubble
2008 – Credit crunch
2018 – Crypto crash
Ask how it would affect them if something like this happened again and what impact it would have on their plan. By broaching these issues now your client will register this outcome as a possibility, making it easier to come to terms with things if it does happen.
Include risk in communications
Validate
Examples & Variables. Include a variable, such as a market correction, and how this would affect the plan and what would happen in that situation. By understanding how a risk event would affect, and potentially change, the plan, your client will have a practical understanding of the risks they are taking.
Remember, you need to follow your company’s compliance approved process when explaining risk. However, getting the client to visualise potential issues can be useful to gauge their reaction and create this as a possibility in their minds, reducing the shock if the risk does occur. Validating understanding will bring out any questions they may have and give the chance to explain again if they don’t understand. A clear understanding of risk also boosts client advocacy so it’s worth investing the time in this area!
