Understanding and managing financial risk is a key part of building long-term wealth, yet many clients remain hesitant to take on the level of risk required to achieve their goals. One of the most valuable roles in the financial advice process is guiding clients to make confident, well-informed investment decisions. By leveraging technology, advisers and paraplanners can help clients gain a clearer understanding of risk and return, ensuring they feel secure in the choices they make, says Steph Willcox, Head Actuary, Dynamic Planner.
Understanding the Psychology of Risk
Many investors are naturally risk-averse, often prioritising the avoidance of losses over potential gains. Behavioural biases, such as loss aversion and recency bias, can lead them to make overly cautious decisions, potentially limiting their long-term financial success. The challenge for advisers is to present risk in a way that resonates with clients, helping them see it not as something to be feared, but as an essential part of wealth creation.
Technology can support this process by providing a structured, objective approach to risk assessment, often allowing paraplanners to understand the financial personality of their clients and the reason they align with a certain risk profile. Technology can also bring this risk profile to light through different methods to help educate clients on the appropriate risk to take. The use of projections, likely asset allocations, risk descriptions and other visual aids like charts, ensures that however a client learns and likes to interact with information, they should find something that resonates.
Bridging the gap between comfort and necessity
While many clients may instinctively gravitate towards lower-risk investments, it is often the case that their financial goals require a more balanced approach.
A key advantage of using technology in this process is its ability to align risk tolerance with financial planning. By clearly mapping out the relationship between risk and reward, advisers can help clients understand what level of risk is appropriate for their individual circumstances. This allows for more constructive conversations, where clients can see the trade-offs involved in different investment approaches through a personalised whole of life cash flow plan with clearly mapped out goals and objectives through time.
Encouraging non-advised clients to take informed risks
Both the FCA and the Chancellor have set out medium term goals to get clients out of cash and into more risky investments – this provides an opportunity for financial advice firms to offer advice to those who would not otherwise seek it.
For those who are not currently seeking formal financial advice, the challenge is often not just about risk, but about engagement. Many potential investors hesitate to enter the market due to uncertainty or a lack of confidence in their own financial knowledge. Here, technology can play a crucial role in breaking down barriers, offering accessible and intuitive ways for individuals to explore investment options.
Educational resources, risk profiling tools, and digital advice platforms can help individuals build a greater understanding of investing without feeling overwhelmed. By demonstrating how different levels of risk can impact financial outcomes, these tools empower clients to take their first steps towards investing with greater confidence.
For advisers and paraplanners, engaging with non-advised clients can also be an opportunity to build long-term relationships. Providing insights, tools, and guidance in an easy-to-digest format encourages potential clients to consider seeking professional advice when they feel ready to take more structured steps in their financial planning.
The role of ongoing coaching
Risk tolerance is not static; it evolves alongside changes in personal circumstances, market conditions, and individual confidence levels. Not all of these changes should be reflected in a client’s investments, and often financial coaching can help to stop clients making inappropriate knee-jerk reactions. One of the key benefits of using technology in financial planning is its ability to facilitate ongoing monitoring and adjustment.
Advisers can use technology to track changes in a client’s risk tolerance over time, helping them to reassess their investment approach when necessary. Regular check-ins, backed by data, reinforce the idea that risk is not a one-time decision but a continuous part of financial planning. This proactive approach not only keeps clients engaged but also builds trust, as they can see that their adviser is supporting them through every stage of their financial journey.
Conclusion
Helping clients embrace financial risk requires a combination of education, insight, and reassurance. By leveraging technology, advisers can provide a structured and transparent approach to risk assessment, ensuring clients feel informed and empowered in their decision-making. Whether working with existing clients or engaging with non-advised individuals, the ability to clearly illustrate the relationship between risk and reward is invaluable.
Ultimately, financial risk should not be viewed as something to be avoided but as a tool that, when managed correctly, helps individuals achieve their long-term financial goals. With the right support and the right technology, advisers can help clients take the steps needed to invest with confidence.
Main image: loic-leray-fCzSfVIQlVY-unsplash
