Framing risk for retail clients

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For financial professionals only

A key challenge for advisers is helping their clients find the right level of investment risk they need to take to achieve their goals and objectives.

First, the client's tolerance for risk must be carefully considered. Most people are uncomfortable with the idea of risk, which creates a dilemma: to what extent should the prescription be altered to accommodate tolerance for the side effects?

And then there’s the fact that most advice for retail customers centres on ‘later life’ income -  just when client wealth is at its peak and anxiety around loss at its greatest.

One approach that can make risk considerations simpler is the 4 pot model.

This approach helps demonstrate that choosing the right investment risk can positively help achieve a client’s varied and competing goals. It can also ease the deep-seated anxiety about losing everything in the process.

The idea is to take the client through a process of allocating their capital to a sequence of increasingly risk-on investment options, making sure at each stage that not too much and not too little capital has been allocated to each pot. 


Every financial plan needs a reserve allocation. As most people are natural savers and not investors, the logical place to start is with the lowest risk bucket. The goal is to ensure the client has enough in liquid assets to be confident about covering unexpected liabilities worth more than one or two month’s income. This Reserve could be in any mix of bank accounts, managed deposits or lower-risk investment solutions like Parmenion’s Sterling portfolio.


The point of retirement is often a time when clients will be looking to fund landmark purchases, lifetime travel or support for dependent family members. Allocating a pot to these spending goals with lower risk, say a Parmenion Tactical Income RG3 portfolio, the potential return could exceed cash returns, with less exposure to market volatility than a mid-risk, higher equity solution. 

Core wealth

Most of a client’s wealth will be in their main portfolio. Selecting a risk level for core wealth is a highly personal decision. This portfolio will often cover drawdown plans, so the amount in it will need to include some capacity for loss. Age, wealth, withdrawals and risk level are all factors in the equation and there’s no right or wrong answer.  For most people, core wealth will be invested at mid or slightly higher than mid risk, e.g. our Conviction solution at risk grades 5 or 6, sometimes 7.


A client who is happy that their cash+, contingency and core wealth pots are in a good place may still have excess capital to invest. Clients allocating to a legacy pot are likely to have a planning horizon well over 10 years. Without a need to offset the potential effects of volatility, higher levels of equity exposure are an option. Where investment is being made for the next generation, we often see advisers selecting ESG solutions, such as our Ethical B portfolios.

Working with behavioural biases

The 4 pot model works at a common sense level and helps combat behavioural biases such as loss aversion that can impact decision making.  

It also serves to support clients’ understanding of investment - one of the pillars behind Consumer Duty. The 4 pot model can expand a retail customer's knowledge and understanding of how, through investment selection, financial outcomes can be better achieved. It reduces anxiety about higher risk when they know that risk only applies to capital genuinely in excess of their needs.

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.

Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.  

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