Capacity for loss is a key part of financial planning, allowing you to provide suitable advice and investment plans to your clients. When it comes to determining a client’s risk profile, you need to do your research and assess their needs and objectives. But most importantly, you need to make sure they fully understand the risks involved and feel comfortable with the goals set.

Capacity for loss is a factual process you need to follow to determine if your client has enough income to absorb any potential investment losses and still be able to live comfortably. To work out how much risk they can afford to take you should consider factors like their assets, age, liabilities and expenditure requirements. 

On the other hand, attitude to risk is a measure that shows how much risk your client feels comfortable taking. It has to do with their feelings and beliefs which might not conform to their financial situation – and examines the level of risk they’re willing to expose their money to when investing.

To achieve good client outcomes, you should assess capacity for loss alongside attitude to risk – while also considering other factors such as their financial literacy and experience. However, to create your recommendations, you’ll need to document them individually.

There are multiple approaches to access capacity for loss, meaning you can use different methodologies and tools. Getting to know your client through the fact-finding process and having meaningful conversations is key to ensuring you get the best outcome. 

Get to know your client and identify their minimum income needs

Talk to your client to understand their individual circumstances and find out more about different aspects of their lifestyle and investment objectives. Start the fact-finding process, identifying their financial situation and minimum income needs, and investigate further, when required, to check if there are any financial issues. Considering their priorities and risk profile will allow you to make an in-depth analysis. Make sure you document your discussions and keep records to show your clients how you arrived at your recommendations.

Knowing their attitude to risk, financial literacy and experience is also essential before making recommendations. This allows them to understand if their goals are realistic to help them achieve their objectives. 

Cashflow modelling

Long-term cashflow modelling is measuring capacity for loss and showing how changes in the market could impact a client’s finances and standard of living. It allows you to review their assets, debts and expenses and set a target income. 

Conquest offers an innovative approach to financial planning. The next generation of cashflow modelling software, it intelligently works with you to find the optimal financial path for your client. Using Artificial Intelligence, Conquest can instantly demonstrate the impact of different scenarios on your client’s goals. 

The efficiency and simplicity of Conquest improves the overall experience of delivering financial advice to your clients. You can build plans faster and achieve the best outcomes. Clients feel more engaged with the process as they can easily understand the advice you’re giving and the lifetime value of your recommendations. This helps them feel more confident about their decisions. 

Conquest is also agile. It supports changing regulatory requirements and trends and can be embedded into your firm’s systems. 

Find out more on how Conquest Planning can help with cashflow modelling. 

Capacity for loss questionnaires 

Detailed questionnaires are another commonly used method of assessing clients’ capacity for loss, by helping to understand their investment goals, attitude to risk and expectations. By including multiple discussion topics and themes, you can work out key questions you need to ask to be able to create a detailed analysis and recommendations. Included questions could cover anything from debts and savings to insurance and health. Once they complete the questionnaire, you can discuss if they have a high or low capacity for loss and whether they need to reconsider their investment risk to meet their goals.

No matter your approach, you need to review investments regularly, as your clients’ financial circumstances might change, so you might need to re-evaluate your plan to suit their risk profile and financial objectives.

Want to find out more about the tool and how it works?  

Talk to one of our specialists to learn how Conquest Planning can help you deliver expert financial advice faster and more accurately.  

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