Helping you understand how much risk you are prepared to accept when making an investment decision.

The following process is designed to help you understand how much risk you are prepared to accept when making an investment decision. It is not trying to place you, as a person, in a particular risk category, but rather guide you on the amount of risk you might want to take if you are looking at a specific investment decision. It also aims to help you understand how an investment matched to this level of risk might behave.

The process will bring you through five stages:

1. RISK

A discussion on what we mean by risk and outline any terms and references you need to be aware of.

2. A FEW QUESTIONS

To help your adviser understand your general attitudes to investing and what you expect from the investment.

3. VALIDATION

A check to make sure that the suggested level of risk is what you had in mind in the first place.

4. INVESTMENT SUITABILITY

A suggested level of risk and how an appropriate investment might behave

5. REPORT

Your adviser will incorporate your validated appetite for risk in their overall report recommending an investment.

1. Risk

There are a number of different types of risk you need to consider before making an investment. Here are just a few to think about.

market-risk

This is the first thing most people think about when they consider investment risk. The risk that you may lose some of your intitial investment. How would you feel if this happened?

inflation-risk

Although your initial investment may be intact, the growth on it may not have kept pace with inflation.This means you would be able to buy less with it at the end of the investment term than you could at the start.

counterparty-risk

You may invest in a product which provides a guarantee. Counterparty Risk is the risk that the institution providing the guarantee isn’t able to honour its promise.

This risk also applies to funds which invest in bank deposit accounts, corporate or government bonds.

liquidity-risk

You might plan to invest for a long time but your circumstances can change unexpectedly. You should take into account that not all investments are easy to get out of early. Some may not give you the full value you might expect, others may not allow you access at all.

concentration-risk

This is the “all your eggs in one basket” risk. If too much of your wealth is concentrated in too few assets, or asset types, you are increasing the negative impact it could have on you if anything happens to one of them.

2. A few questions

We are now going to ask you 5 simple questions so we can understand a bit more about your investment experience and attitude to risk. The questions will ask you about:

  • Your investment experience
  • The importance of this investment to you
  • Your attitude to the safety of this investment
  • The risk and return expectations
  • Your attitude to short term loss

3. Validation

Based on your answers to the questions posed in Step 2, your Financial Advisor will suggest a level of risk he or she thinks is most appropriate for your needs.

Although an investment’s risk can change over time, this tool can give you a feel for the types of return an investment may demonstrate if its risk level stays the same. Your advisor will bring you through possible ranges of returns for the level of risk they think most appropriate. You can then decide if this matches what you had in mind, or you can look at alternative risk options.

4. Investment Suitability

There are a number of different types of risk you need to consider before making an investment. Here are just a few to think about.

measure-risk

We use the European Securities and Markets Authority (ESMA) risk scale. This scale is widely used throughout the investment industry and uses volatility to classify different investments along a 7 point risk scale. Volatility is a measure of how much an investment’s value goes up or down over a given time.

No Risk

Based on your responses, a Very Conservative investment might be suitable for your needs.
You are likely to need an investment which gives some form of capital protection. Your Financial Broker or Adviser will talk to you about possible options.

When looking at products which provide capital protection you need to be particularly aware of:

  • Counterparty Risk
  • Inflation Risk
  • Liquidity Risk

3 out of 7 – Low to Medium Investment

risk-6

A diversified investment will have a mix of defensive and growth assets. This mix will determine how risky the fund is and what would be a reasonable long term growth potential.

The more growth assets held the riskier the investment but the higher the long term growth potential.
A fund with a risk rating of 3 is likely to have a significant weighting to defensive assets. Based on Society of Actuary guidelines, 4.00% p.a. would be a reasonable long term average expected return for such an investment.

Investment Suitability – Short Term Volatility

long-term-volatility-6

Although it is reasonable to have a long term average expected return, the returns in any one year are going to be higher or lower than this. Depending on the expected volatility of the investment, it is possible to estimate a range of annual outcomes which would be deemed ‘normal’ for that type of investment. The graphic opposite illustrates the likely spread of annual returns. You will see that most of the time returns will be around the long term expected average. However, more extreme outcomes are probable.

*This assumes 95% probability, more extreme outcomes are possible.

Investment Suitability – Long Term Volatility

long-term-volatility

Over time your investment will have both good and bad years. The longer your investment period the predicted range of annual returns will get closer to the long term average.
However, you should also note the impact of compounding. A small annual profit or loss, over a long period of time, can have quite an impact on the value of your investment.

*This assumes 95% probability, more extreme outcomes are possible.

4 out of 7 – Medium Investment

A diversified investment will have a mix of defensive and growth assets. This mix will determine how risky the fund is and what would be a reasonable long term growth potential. The more growth assets held the riskier the investment but the higher the long term growth potential.

A fund with a risk rating of 4 is likely to have a good balance between defensive and growth assets. Based on Society of Actuary guidelines, 4.75% p.a. would be a reasonable long term average expected return for such an investment.

Investment Suitability – Short Term Volatility

 

Although it is reasonable to have a long term average expected return, the returns in any one year are going to be higher or lower than this.
Depending on the expected volatility of the investment, it is possible to estimate a range of annual outcomes which would be deemed ‘normal’ for that type of investment. The graph opposite illustrates the likely spread of annual investment returns. You will see that most of the time returns will be around an expected long term average. However, more extreme outcomes are probable. *This assumes 95% probability, more extreme outcomes are possible.

Investment Suitability – Long Term Volatility

4-7-long-term-average

Over time your investment will have both good and bad years. The longer your investment period the predicted range of annual returns will get closer to the long term average. However, you should also note the impact of compounding. A small annual profit or loss, over a long period of time, can have quite an impact on the value of your investment.

*This assumes 95% probability, more extreme outcomes are possible.

5 out of 7 – Medium to High Investment

A diversified investment will have a mix of defensive and growth assets. This mix will determine how risky the fund is and what would be a reasonable long term growth potential. The more growth assets held the riskier the investment but the higher the potential for long term growth. A fund with a risk rating of 5 is likely to have a higher weighting in growth assets. Based on Society of Actuary guidelines, 5.25% p.a. would be a reasonable long term average expected return for such an investment.

Investment Suitability – Short Term Volatility

medium-to-high-investment

Over time your investment will have both good and bad years. The longer your investment period, the range of annual returns predicted will get closer to the long term average. However, you should also note the impact of compounding. A small annual profit or loss, over a long period of time, can have quite an impact on the value of your investment. *This assumes 95% probability, more extreme outcomes are possible.

long-term-average-5

6 out of 7 – High Investment

A diversified investment will have a mix of defensive and growth assets. This mix will determine how risky the fund is and what would be a reasonable long term growth potential.

The more growth assets held the riskier the investment but the higher the long term growth potential.
A fund with a risk rating of 6 is likely to have a significant weighting of growth assets. Based on Society of Actuary guidelines, 5.75% p.a. would be a reasonable long term average expected return for such an investment.

Investment Suitability – Short Term Volatility

risk-6

Although it is reasonable to have a long term average expected return, the returns in any one year are going to be higher or lower than this. Depending on the expected volatility of the investment, it is possible to estimate a range of annual outcomes which would be deemed ‘normal’ for that type of investment.
The graph opposite illustrates the likely spread of annual investment returns. You will see that most of the time returns will be based on the long term expected average. However, more extreme outcomes are probable. *This assumes 95% probability, more extreme outcomes are possible.

Investment Suitability – Long Term Volatility

long-term-volatility-6

Over time your investment will have both good and bad years. The longer your investment period the predicted range of annual investment returns will get closer to the long term average. However, you should also note the impact of compounding. A small annual profit or loss, over a long period of time, can have quite an impact on the value of your investment. *This assumes 95% probability, more extreme outcomes are possible.

5. Recommendation

Your appetite for risk is one of the inputs into which investment is suitable for your current needs. Your Financial Broker or Adviser will conduct a full Financial Fact Find with you before recommending a specific fund or funds. The output from this Investment Suitability Process should be read in conjunction with your Financial Broker or Adviser’s recommendation.

It is important to be aware that there are a number of different ways to look at assessing appetite for risk and it is not an exact science.

This process does not take into account all your personal circumstances and therefore the calculations may not be appropriate to your personal circumstances.

You should not rely solely on this process to make an investment decision. In all cases we recommend that you consult a Financial Broker or Advisor who will conduct a full financial review and fact-find with you and advise you accordingly.

The calculations provided by the Friends First Investment Suitability Process are for general illustration purposes only, based on the limited inputs you have given and assumptions made. Although Friends First endeavours to ensure that this ‘Investment Suitability Process’ is accurate, we cannot guarantee it is free of errors or suitable for any user’s intended purposes. To the extent permitted by law, under no circumstances will Friends First be liable for any investment loss or damage caused by a user’s reliance on information obtained by using this process.

    RISK ASSESSMENT QUESTIONNAIRE

    YOU

    Name

    Email

    Investment Experience

    How experienced an investor are you?
    I am not experienced, I have rarely invested in the pastI have invested before but only in relatively simple productsAlthough I am not an expert, I do understand how markets work and am comfortable in my ability to make most investment decisionsI have made investments in the past and would consider myself an experienced investor

    Importance of this Investment

    How important to you, is the investment you are considering now?
    I am very reliant on this investment and would be in trouble if I lost any of itI have other funds/sources of income but would feel pain if I suffered significant losses nowI will not be reliant on this investment in the next 10 years, but I will be after thatThese are surplus funds and I am unlikely to be dependent on them

    Safety of this Investment

    Thinking of the investment you are about to make, do you agree/disagree with the following statement: ‘I want my investment to be safe even if it means lower returns in the long run’
    I strongly agree with this statementI tend to agree with this statementI neither agree nor disagree with this statementI tend to disagree with this statementI strongly disagree with this statement

    Risk and Return Expectations

    What risk and return expectations do you have for this investment?
    I would only invest if I had a guarantee of getting at least my original investment backI want to earn a little more than I could on deposit. I would only take on a small amount of risk to achieve thisI am looking for steady long term growth and am prepared for some short term fluctuations in the value of my investmentI am looking for strong long term growth and understand this could lead to large fluctuations in the value of my investmentI want to maximise returns and am very comfortable taking on a high degree of risk to achieve this

    Attitude to Short Term Loss

    In order to achieve higher returns you need to be comfortable with short term losses. What is the maximum percentage of loss you could tolerate in any 12 month period, before becoming uncomfortable?

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