The dangers of confusing risk appetite with capacity for loss

In the lead-up to the Retail Distribution Review (RDR), and now that it has arrived, one of the key areas of impact is client suitability.

The RDR requires advisers to perform much more stringent suitability checks, chiefly consideration of how much risk a client is “willing and able to take”. It therefore seemed an apt time to remember what the FSA says about an investor’s capacity for loss and attempt to address a common misconception that capacity for loss is little different to risk appetite. Any investment is subject to fluctuations in value: the magnitude of these fluctuations depends largely on, and to a certain extent can by controlled by, the contents of the portfolio. Cognisant of this, the FSA has had clear...