European regulators and the funds industry have become acutely aware of the need to give retail investors a greater understanding of the amount of risk they might be taking when making an investment.
The European Securities and Markets Authority [ESMA] is an independent committee of European Securities regulators. Its role is to help improve co-ordination between different securities regulators and act as an advisory group to assist the European Commission. It has produced guidelines as to how investment managers should represent risk and return to consumers. It is intended that these guidelines will be adopted as the standard approach across all European fund managers.
The ESMA Risk Rating methodology uses a seven point scale based on 5-year annualised volatility without the scope for subjective intervention.
Investments that are most likely to experience large changes in their value over time are described as volatile and they tend to have higher expected returns. Investments that are less likely to experience large changes in their value over time are less volatile and tend to have lower, more stable expected returns.
It is widely accepted for example, that equities [shares] are generally the most volatile investments, followed by property [Real Estate]. Fixed interest investments are generally less volatile and cash is perceived as stable.
Adelphi Financial Brokers has decided to adopt the new standardised rating system. All customers, wishing to make an investment, will now complete a Risk Assessment Questionnaire in which the questions have been designed to scientifically measure their risk tolerance. A report will then summarise the results of the completed questionnaire which will help consumers make informed investment decisions.
The report is designed to provide an indication of your attitude to risk; it does not provide any guarantees that you will receive what you want to achieve. The value of your investments can fluctuate and you could get back less than you pay in. What you get back will ultimately depend upon how your investment grows in practice and the tax treatment of your investment.
Investors still need suitably qualified advice on their investment options.