How to Manage Risk With Wealth Management?
Risks and their consequences come in all shapes and sizes.
Leaving your umbrella at home when there is a chance of rain is a risk. The consequence is you might get wet.
With money, consequences can be far worse. We cannot avoid risk entirely, but we can control it.
This guide explores how to manage risk with wealth management. We cover what it is, what to look out for, and strategies to manage risk more effectively.
What is wealth management?
Wealth management is a comprehensive approach to financial planning. Its objective is to create and preserve wealth for individuals and families.
Advisers work closely with clients to understand their goals and build customised strategies to reach them.
Common wealth management services include:
- Investment management and portfolio management
- Tax advice
- Estate planning
- Retirement planning
- Risk management
Read our guide to wealth management services to learn more.
You can also see how to choose the right wealth management firm to ensure you get the expertise you need.
What is risk management?
Risk is the possibility of an adverse outcome or less than desired result.
In finance, that means uncertainty or the potential for losses.
- The level of uncertainty
- The potential for losses
Two principles matter for investing.
Returns tend to be proportional to risk. Higher reward usually requires higher risk.
Risk is inherent to every investment product, no matter how small the risk appears.
We cannot remove risk, but we can manage it. Risk management balances risk and reward and is central to a sound plan.
The types of risk in wealth management
Broadly, risk sources fall into two groups: unsystematic and systematic.
Unsystematic risk is company or industry specific, such as performance, management changes or regulation shifts.
Systematic risk is market wide and cannot be diversified away completely.
Key examples include:
Market risk
The risk of loss due to market movements. It is difficult to avoid and can dominate short term outcomes.
Inflation risk
Rising prices erode purchasing power and can reduce real returns over time.
Interest rate risk
Changes in interest rates affect asset prices, especially fixed income. When rates rise, bond values tend to fall.
Credit risk
The chance a borrower fails to pay interest or principal, causing losses to lenders or bondholders.
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Strategies for managing risk with wealth management
Wealth managers use several methods to mitigate risk. Common approaches include:
Analyse risk tolerance
Everyone is different. Before any recommendation, advisers assess your objectives and tolerance for risk.
A clear view of comfort levels helps balance risk and reward appropriately.
Asset allocation
Do not put all your eggs in one basket. That is the essence of prudent financial advice.
Asset allocation spreads investments across equities, bonds, real estate and other assets to shape portfolio risk.
A 100% equity portfolio is high risk. A 100% bond portfolio is lower risk. Most investors need a balanced mix.
You might like: Guide to wealth management for high net worth individuals (HNWI)
Diversification
Different from allocation, diversification focuses on low correlation holdings within and across asset classes.
If one holding falls, others may offset the impact.
Ways to diversify include:
- By asset class
- By industry
- By geographic region
Funds such as mutual funds and ETFs provide efficient diversification through ready made baskets of securities.
Learn about: Wealth Management or Private Banking?
Regular portfolio rebalancing
Life changes. Goals evolve. Your portfolio should reflect that.
Periodic reviews and rebalancing help control risk and keep your strategy aligned with objectives.
Managing risk with wealth management services
You cannot eliminate investment risk, and higher potential reward generally involves higher risk.
With the right approach, you can limit risks and protect your financial future.
If you want to avoid the pitfalls of going it alone, we can help.
Holborn Assets provides a holistic approach to wealth management, supporting you at every step toward your goals.
With award winning service and experienced professionals, we help ensure your money is in the right place at the right time.
Do not take unnecessary risks with your finances. Book a free, no-obligation meeting and learn how we can help.
