Risk Management
Financial Risk Analysis
Financial risk analysis identifies where a household, portfolio, or business is most vulnerable before an adverse event forces a decision.
Framework
Risk is broader than market volatility
A portfolio can be diversified and a financial plan can still be fragile. Risk analysis looks across market exposure, concentrated holdings, liquidity, leverage, cash-flow dependence, insurance gaps, business risk, taxes, fraud, and the timing of major obligations.
Portfolio Risk
Evaluate concentration, factor and asset-class exposure, drawdown sensitivity, liquidity, duration, credit risk, and the relationship between holdings.
Balance-Sheet Risk
Review liabilities, emergency reserves, borrowing structures, large commitments, and assets that may be difficult to sell when liquidity is needed.
Income and Human-Capital Risk
Consider dependence on employment, business income, equity compensation, pensions, or other sources that may be correlated with investment risk.
Protection and Operational Risk
Identify material insurance gaps, beneficiary or titling issues, account-security concerns, and process weaknesses that could magnify a financial loss.
Approach
The objective is resilience, not the elimination of uncertainty
Risk cannot be removed from investing or life. It can be identified, measured where possible, diversified, transferred, funded, limited, or consciously accepted. The important step is deciding which risks are worth taking and which ones do not serve the client’s goals.
- 01Define the objective
- 02Measure the current position
- 03Compare practical alternatives
- 04Implement and review
Frequently asked questions
Questions worth answering clearly
What is the difference between risk tolerance and risk capacity?
Risk tolerance concerns how an investor reacts to uncertainty and loss. Risk capacity concerns how much loss the financial plan can absorb without impairing important goals.
Does risk analysis include insurance?
Yes. Insurance can be part of the analysis when a low-frequency, high-impact risk is better transferred than self-funded.
Can risk analysis eliminate investment losses?
No. Investment risk cannot be eliminated, and losses are possible. The purpose is to understand exposures and design a portfolio and financial structure that are appropriate for the client’s objectives and constraints.
Next step
Start with the decision you need to make.
Use the Global Advisers contact process to discuss fit, scope, and the appropriate next step.
