Risk management from a client’s perspective

By: Eugene Botha, deputy chief investment officer, Momentum Investments

Eugene Botha

What does risk management look like from the client perspective?

In our final edition of our four-part series on risk management of Mindfields, our research publication, we look at the challenges investors face, as they navigate their way through their investment journey. This edition covers aspects such as the difficulty of making decisions in the context of investing and the noise in the process. The noise from the markets, the advice investors receive and their emotions, particularly, are discussed, as these sometimes conflict with each other. An important area of focus for us is the increasing field of knowledge of investor psychology and related behavioural biases that complicate the effectiveness of decision-making.

While we focused primarily on risk in these four editions, the principles of risk management and, in some sense, the definitions of risk, we have to remember that there is also a risk in avoiding risk as well.

It is necessary to accept that taking on risk is necessary to deliver on clients’ longer-term investment goals.

The key is to understand and then manage these risks, and to make sure no unintended consequences stem from taking unnecessary, or unwanted, ones. There are also consequences in trying to time the market – in other words, trying to choose when to take risk and when not to. Long-term returns can be very easily jeopardised by bad risk management. It can often have a much worse effect than just accepting the risk in the short term. This concept is addressed in the latest Mindfields by measuring the effects of not remaining invested through times of stress.

We often overlook the very real risk poor advice can have on the outcomes for any investor, in particular those who are members of retirement funds. An onerous responsibility is placed on trustees to make the right investment decisions on behalf of the fund’s members, and this does not come without risk. We unpack some detail on what trustees can do to mitigate this advice-related risk with an emphasis on embedding some form of pre-designed ‘intelligence’ into the preretirement strategy that changes the strategy based on a member’s selected post-retirement strategy. Through benefit counselling services, members can gain access to sound financial advice. They should look to continually educate and train members on investment-related matters, particularly on the need to align their pre- and post-retirement investment strategies. Trustees need to appreciate that advice risk exists. Not all advice is of the same quality and does not always meet the specific needs of their individual members. It is incumbent on them to recognise the potential for this advice risk and remain vigilant in terms of mitigating it. The best way to do this is to broaden their minds on investment-related matters, engage with different parties involved in the process and expose themselves to parties outside of their current service providers.

The decision on the correct choice of a post-retirement annuity is also an important one for all investors. The wrong decision can lead to the risk of no inheritance or, even worse, not having enough income to sustain a certain standard of living after retirement. Incorporating a combination of life and living annuities into the post-retirement strategy can lead to some benefits and seems promising, but it is essential for individuals to consider their personal circumstances before making any investment decisions. Factors such as risk tolerance, inheritance needs, desired income levels and income flexibility, as well as future financial goals should be carefully assessed and discussed with a financial adviser to determine the optimal allocation of life and living annuities within a retirement portfolio. Each individual’s situation is unique, and a tailored approach is crucial to make sure the strategy aligns with an individual’s specific needs and objectives.

Risk is, and remains, a fickle concept, whether we look at it from a client perspective, investment perspective or even an adviser perspective. Even though risk is unpredictable, risk management is key in making sure the unpleasant surprises are kept at a minimum, while focusing on the goal in place.

To download the latest edition of Mindfields, click here.

The previous editions are also available for download below:

Mindfields: Price and Liquidity Risk Management

Mindfields: Managing Macro Risks

Mindfields: Fiduciary Risk

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