Capacity for Loss
SussexParaplanner
Member
Hi,
Does anyone have any ideas on how best to measure Capacity for Loss? We are trying to make our procedure more robust and wondered whether there was any recommended technology that would help us determine this? This is primarily where the objective is for growth of the funds with no specific target financially in mind as other incomes would maintain the required lifestyle therefore they could, potentially, lose 100% and still be financially secure.
Any tips welcome!
Comments
Hi,
There are so many ways to assess this. The best I see involve a cashflow forecast that uses either:
Be realistic with spending, now and in the future. Don't rely on things that aren't really there - like an inheritance from an aunt or main residence downsizing (which advisers have recently taken to referring to as 'rightsizing' 🤢). The issue with these is you don't know if that inheritance is really coming and is you move to a smaller house, maybe you'll buy better quality or in a more expensive area i.e. you won't see a windfall from it.
In terms of software, if you're using cashflow that's probably the best place to start. If you want to get really trick with income planning then you can use Timeline, but I see this as being useful only as an add on, it doesn't replace cashflow.
How did you get to know that they can lose 100% and still be fine? Assuming that isn't just being eyeballed, whatever you did to get to that outcome is your assessment.
As a side bar, an objective for growth with no specific target financially in mind is not a suitable reason to take on investment risk. If there is no objective, and they don't need the money, then what's wrong with leaving it in cash? Why should the client pay lots of fees and expose their capital to investment loss if they don't need it to do anything for them?
Hi - thanks for the response.
I would agree with the cashflow recommendation.
We have had clients wishing to invest cash with the hope to achieve growth higher than the dire interest rates but at the same time with no specific figure in mind that they wish for this to grow to. Of course we're trying to ascertain the specific reason for the growth but some people just want more than interest rates offer etc
The example of 100% is from a client who approached us recently and said, as mentioned above, they wished to receive growth but at the same time the loss of the monies to be invested would not impact the standard of living they desire in retirement.
Totally agree with the realistic stance too - there are far too many cases at the moment where there is a reliance on "this could happen" or "this is likely" - definitely feel Capacity for Loss should be realistic and factual.
Appreciate the response.
wishing to invest cash with the hope to achieve growth higher than the dire interest rates
This is a financial objective 👍
Thanks for the response on this - often good to talk these things out to ensure you're not going mad! Much appreciated.
Yeah we use Voyant GO to help with this. Has a Capacity for Loss insight that gives a specific number and % which helps clients understand. Benjamin, I quite like 'rightsizing'
Ditto with Voyant GO and it has multiple ways of stress testing and measuring C4L - they ran a session recently on this; recording might be up on their YouTube page?
Rightsizing - it does have a certain ring to it....
Great, thanks guys.
We use O&M Pension Profiler. It gives you a nice CFL Report at the end.
I would also add that discretionary spending and non-discretionary spending plays a huge part. If a client has a defined benefit pension that covers all essential expenditure, their capacity for loss could be deemed as high.