When assessing investment suitability, most advisers and investment managers take into consideration customer’s attitude to risk, but they fail to account appropriately for their capacity for loss. Therefore, this calls for financial consultants to assess the clients’ attitude towards risks during the evaluation of investments process using the most suitable tools.
While assessing the individual’s attitude towards risks, the use of gender, age, parental background and even height is used to measure the willingness to take risks in general (Newell, Chan & Goodridge 2011, p 210-19). To better understand the attitude to risk by investors, data from previous research as well as field experiment, are used to assess these attitudes. The previous review is done in order to know the gaps to be filled while determining the attitudes towards risks. A random sample of clients that come to the bank as well as online banking clients are requested to fill in questionnaires. In this quest, to fill gaps, there are things that need to be taken in to consideration as the process of assessment is taking place.
According to Mowbray (2011), gaps are bridged by focusing on some key themes such as the risk that a client is willing and able to tolerate, the client’s capacity for loss and identifying clients who are neither willing nor able to accept the risk of loss. Apart from that, the client’s requirements must be considered, and this involves collecting of information that includes the client’s investment knowledge, risk tolerance, investment horizon and the capacity to make regular contributions and meet extra collateral requirements where appropriate.
Thereafter, every client’s information should be documented and appropriately updated on a continuous basis. In case a client does not give full information, it does not mean that the advisor cannot assess the client’s attitude towards risk. If the same advisor is not able to make the assessment, an explanation has to be made to the client on the limitation of assessment due to lack of information or the assumptions made in relation to advice given. After having the information of various clients, a hierarchy is developed to clarify their needs and the firm’s products. The upper levels of the hierarchy are solved to give a weighting scheme that determines the relative importance of each factor while determining the applicable portfolio. The lowest level of the hierarchy evaluates assets to give a portfolio applicable for a single investor’s problem (Bolster, Janjigia & Trahan, 1995). The most suitable portfolio is chosen by combining the local weights derived for every asset and weights given by the higher levels of the hierarchy (Saaty, 1980). The figure 1 below explains the hierarchy of needs and its possible matching products. Investment opportunities There are different types of investments and each work differently. The most common list of investments usually includes ISA, shares, unit trusts, property and shares and much more. This section describes the opportunities as well as giving advice to the clients while choosing investment that best suits their finances and other needs. The firm, as an investment bank, seeks to assist clients in raising capital by acting as the client’s agent in the securities issuance. The firm, also, can manage mergers and acquisitions for companies as well as provide subsidiary services, for example, derivatives trading, instruments of fixed income, foreign exchange, commodities equity securities and market making. Figure 1: Analytical Hierarchy