How to Manage Risk with Wealth Management

Risk is an inherent part of wealth management. But, with the right strategy, you can reduce risks that pose a threat to your money and manage risk with wealth management. Read our guide to learn how to manage risk effectively.

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Risks and their consequences. They come in all shapes and sizes.

Deciding to leave your umbrella at home when there is a chance of rain is a risk. The consequence of taking that risk is that you get wet.

But when it comes to managing your money, the consequences can be far worse. And while we can’t avoid risks, we can control them.

Our guide explores how to manage risk with wealth management. We will examine what it is, what to look out for and strategies to better manage risk.

What is wealth management?

Wealth management is a comprehensive approach to financial planning. Its primary objective is to create and preserve wealth for individuals and families.

Wealth managers work closely with clients to understand their goals and develop customised financial strategies to help them achieve them.

Wealth management encompasses various financial services, such as:

Read our guide to wealth management services to learn more.

Alternatively, read our article on how to choose the right wealth management firm to ensure you get the expert advice you need.

What is risk management?

Risk simply means the possibility of something bad happening or less than desirable results.

When we apply that to financial risks, we are talking about either:

  • The level of uncertainty
  • The potential for losses

When it comes to investing, there are two things you need to understand.

The first is that returns are directly proportional to the level of risk. In other words, the higher the reward, the higher the risk.

The second is that risk is an inherent part of investing. Every investment product carries some degree of risk, no matter how small.

So, risk is something we can’t get away from, but it is something we can manage. This is where risk management comes into play.

As the name suggests, risk management is a strategy for managing risk. It is the process of balancing risk vs reward and is an essential part of your wealth management strategy.

Managing Risk with Wealth Management

The types of risk in wealth management

Broadly speaking, sources of risk can be broken down into two main categories – unsystematic and systematic risk.

Unsystematic risk is unique to a specific company or industry. Some examples include company performance, a change in management or regulations.

Meanwhile, systematic risk refers to the risk that is inherent in the market as a whole, not just a specific company or industry.

Let’s take a look at some of the more specific types of risk associated with wealth management.

Market risk

This is the risk of investment loss due to changes in market conditions. Market risk is one of the biggest risks involved in wealth management. This is because it is harder to avoid and offset with common investment strategies.

Inflation risk

This is the risk that the market price of an asset will fall over time due to rising inflation, leading to a loss for the investor. Inflation reduces the purchasing power of your money. Over a period of time, it can erode the value of your investments.

Interest rate risk

Interest rate risk refers to the risk of loss due to changes in interest rates. This type of risk typically applies to fixed-income securities such as bonds. When interest rates rise, the value of fixed-income securities decreases.

Credit risk

Credit risk is the chance of a loss due to the default or failure of a borrower to repay a loan or bond. In other words, the risk that you, as an investor, will not receive what you are owed.

While there are additional risks outside those mentioned above, these are the leading wealth management risks.

Strategies for managing risk with wealth management

There are various strategies used to mitigate wealth management risks. Here are some of the methods that wealth managers use to manage risk.

Analyse risk tolerance

Everyone is different. Some people are simply more risk-averse than others. Before giving you any investment advice, a wealth manager will want to know your investment goals and risk tolerance.

A risk tolerance assessment is the process of evaluating your ability to take on risk. By knowing how much you are comfortable with, you can strike a balance between risk and reward.

Asset allocation

One of the most common pieces of financial advice you hear is, don’t put all your eggs in one basket. That is the basic principle of asset allocation.

Asset allocation is a common investment strategy used to reduce risk. It is the process of splitting your investments between different asset classes. These include stocks, shares, bonds, real estate and so on.

The percentage of a given asset class will determine the risk overall risk of your investment portfolio. For example, a portfolio consisting of 100% equities (shares) will be high risk. On the other hand, investing 100% in bonds will be the lowest risk.

The idea is to reach a happy medium and balance risk and reward.

You might like: Guide to wealth management for high net worth individuals (HNWI)

Diversification

Although the two terms are often used interchangeably, there is a difference between diversification and asset allocation.

Think of diversification as a more granular form of asset allocation. It is the process of building an investment portfolio of assets with a low correlation that behaves differently from each other.

The principle is simple. If the share price falls on one investment, the other will pick up the slack and offset any losses.

Some of the ways you can diversify include:

  • By asset class
  • By Industry
  • By geographic location

Funds can provide an effective way to diversify. Mutual funds and exchange-traded funds (ETFs) provide exposure to large baskets of ready-made assets, making them a convenient option.

Learn about: Wealth Management or Private Banking?

Regular portfolio rebalancing

As life changes, so do your needs, goals and objectives. It’s important that your portfolio reflects those changes.

A regular portfolio review involves evaluating your portfolio’s performance and making necessary adjustments to reduce potential risks and optimise returns. Doing so ensures that your portfolio aligns with your investment goals and objectives.

Managing risk with wealth management services

As we stated previously, you can’t eliminate investment risk. And with greater reward comes greater risk.

The reality is that risk is almost impossible to avoid. However, with the right approach and smart investment decisions, you can limit the potential risks and protect your financial future.

If you want to avoid the potential perils and pitfalls that come with managing your wealth, we can help.

Holborn Assets is a leading global financial services company. We provide a holistic approach to wealth management, supporting you every step of the way to help you reach your financial goals.

With award-winning service and access to a team of highly experienced professionals, we help ensure your money is in the right place at the right time.

Don’t take any unnecessary risks with your finances. Book a free, no-obligation meeting today and learn how we can help you.

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