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The ideas and conclusions within these blogs are the authors' own and do not necessarily reflect the views of Octopus. They are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any investment. For our full terms and conditions, please click here.

Risk profiling for a common language and a better service

Colin Lunnon - 03 December 2010

Using money for financial planning allows us to keep score. This involves setting what we have and earn now, and what we may have in the future (our assets), against our debts and likely spending over time (our liabilities). Over the course of our lives we have to balance these assets and liabilities and that takes planning. This is where a trusted financial adviser is invaluable as they can help with discussing options and remaining objective.

Of course, establishing these parameters is only one part of financial planning. Another major aspect is that, in essence, we're all different and how each of us attempts to juggle our ‘financial' life path is a deeply personal affair. This is highlighted every time you walk into a post office. Plastered all over the walls are adverts for NS&I (National Savings & Investments). The genius of this brand is that it begs us to ask the question - "am I a saver or an investor?"

If a ‘saver', you'll probably be unhappy seeing losses in the money that you likely put away consistently, a little at a time. Meanwhile, if you're an ‘investor', you recognise that there's no reward without risk. Although you have the confidence that your returns will be higher, you may invest a little more sporadically, using lump sums.

In reality, we all sit somewhere between these two extremes. Again, a trusted financial adviser is there to help you decide what is right for you. In particular, they can help in balancing your personal inclination with the practical questions of assets and liabilities.

I am not a financial adviser, nor are my colleagues at Octopus. But just as your local doctor will make a referral once your situation has been identified, numerous financial advisers send their clients to us. Our job is then to help meet the goals of the financial plan you made with your adviser.

Within this process we can see a reasonably recent change in finance coming to the fore - the use of improved ‘risk profiling' techniques. These allow for a better understanding of investors and their expectations. Nowadays there's also more interaction between advisers and fund managers around risk profiling. The roots of risk profiling go back to the 1950s, but only recently have all the tools been developed to allow advisers to clearly communicate an individual's personal mix between ‘saver' and ‘investor' with us as the managers of investors' money.

Next time you talk to your adviser, you may like to ask for your own personal risk profile. Once your risk profile is established, it helps us ensure that we are not only trying to invest your money for maximum gain, but also in a way you will feel comfortable with. In my next blog I will go through how we achieve this.

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The investments referred to on this website may not be suitable for all investors. Octopus does not provide, and nothing on this website should be construed as, investment or tax advice. Potential investors are recommended to seek specialist independent tax and financial advice before investing in any of our products. It is not intended that anything stated in this website should be construed as an offer, or invitation to treat, or inducement for you to engage in any investment activity. The information on this website relating to funds managed by Octopus is directed at United Kingdom residents only and funds referred to on this website will not be offered to non-residents.

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The share price of a VCT may not reflect its net asset value. There is only a limited secondary market for shares in VCTs which may render such shares difficult to sell as they may not be readily marketable. VCTs invest in unquoted and AIM-quoted companies which are therefore smaller and carry a higher level of risk than shares which are listed on the main market of the London Stock Exchange. The shares of VCT investee companies may not be readily marketable. Before making an investment, ensure that you have read and understood the risk warnings set out in the VCT prospectus. An investment in a VCT should be regarded as a long-term investment.

Inheritance Tax Portfolio Services

Investments in unquoted and AIM-quoted companies tend to carry a higher risk than investments in most securities listed on the main market of the London Stock Exchange and may be more difficult to sell. The inheritance tax relief applies to holdings in qualifying unquoted and AIM-quoted companies if they have been held for more than two years at the time of death and is based on current tax rules and regulations. Money that is withdrawn from qualifying holdings, or that has not been invested in qualifying unquoted or AIM-quoted companies for at least two years, will not generally be exempt from UK inheritance tax. We will invest in companies that we reasonably believe to be qualifying investments based on our understanding of HMRC's current interpretation of the rules and regulations, but we cannot guarantee this, nor can we guarantee that any changes in legislation will not have a retrospective effect. Please remember that tax rules and regulations are subject to change and depend on personal circumstances. The level of income from the Octopus ITS is not guaranteed.

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Investments into an EIS must be retained for a minimum of three years in order to retain the upfront income tax relief. Investments made into EIS qualifying companies, because they are in unquoted companies, are likely to be higher risk than securities listed on the main market of the London Stock Exchange. Investments in shares in unquoted companies are not readily marketable and the timing of any share sales and other such realisation cannot be predicted or controlled. A partial withdrawal of an investment in an approved EIS fund is not permitted. Tax rules and regulations are subject to change, and depend on personal circumstances. Readers of this website who intend to invest in Eureka or the Octopus EIS are reminded that such an investment may only be made on the basis of the information and other risk factors contained in the product brochure. Octopus will make investments which we reasonably believe to be EIS qualifying investments at the time of acquisition (but please be aware that we give no commitment that any such investment will remain a qualifying investment at all times thereafter). Companies in which we invest may cease to qualify. In this case, the relief available on that particular investment will be lost.

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Investments made by the Octopus ITS, because they are in unquoted companies, are classified by the FSA as higher risk than companies on the London Stock Exchange official list. An investment in the Octopus ITS is not suitable as a short-term investment and should be held for at least two years. Rates of tax, tax benefits and allowances described in the brochure are based on current legislation and HM Revenue & Customs practice. These may change from time to time and are not guaranteed. In this case, the inheritance tax relief available on the investment may be lost. Changes in law can have a retrospective effect. The Octopus Enhanced Discounted Gift Solution has been designed with UK-resident taxpayers in mind. If you are not resident or ordinarily resident in the UK for tax purposes, it may not be appropriate or advantageous for you to invest in this product. This product utilises a trust to facilitate planning. Trusts are a legal arrangement and prospective investors are advised to seek legal advice if they are unsure of their rights and obligations. The taxation of trusts can become complicated, and investors should seek tax advice from a professional adviser.

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The fund will invest in securities issued by smaller companies and the market for these securities may be less liquid than the market for securities issued by larger companies. Investment in smaller companies (including companies quoted on AIM) can be higher risk than investment in larger, more established companies and as a result, the performance of the fund may be more volatile. The fund can use both ‘long' and ‘short' positions in individual stocks and markets, which may be more volatile than other investments, such as cash or bonds, and the value of the fund can therefore move independently from the general direction of the stock markets, rising as markets fall but theoretically it can also fall as markets rise. Octopus uses a risk management process to oversee and manage derivative exposure within the fund. The investments made by the fund may not always be readily realisable and their marketability may be restricted. As the fund may invest in a comparatively small number of companies, it may be more volatile than funds that are more diversified. Before investing, please ensure that you have read the information set out in the simplified prospectus, which includes full details of the charges. The authorised corporate Director is City Financial Investment Company Limited.

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Before investing, please ensure that you have read the information set out in the Octopus Portfolio Manager brochure. An investment in Octopus Portfolio Manager should only be considered for the medium to longer term. Tax laws currently in place may change in the future, which could affect the value of an investment. There is no guarantee that the investment objective of the Octopus Portfolio Manager will be achieved. We do not take responsibility for, nor do we provide advice as to, the suitability or appropriateness of the specific Investment Profile selected by an investor. We reserve the right to decline any application where the applicant has not received professional financial advice. It is the responsibility of the investor (on the advice of their financial adviser if appropriate) to keep their financial circumstances, objectives and appetite for risk under review and to assess whether the specific Investment Profile that has been selected remains suitable for their needs. We shall not be liable for any losses that an investor suffers as a result of their selection of a specific Investment Profile and cannot and do not make any representation that such selection is suitable or appropriate for the investor's specific needs and requirements.

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