What Do Investment Risk Categories Mean For Court Of Protection Deputies? (Video)

There is no industry-standard way of describing investment risk, so deputies will see different firms use different scales, some numbered (1 to 10), some worded (balanced, moderate, dynamic, adventurous). What matters more than the label is understanding three separate elements behind it: attitude to risk, capacity for loss, and need to take risk. For most Court of Protection cases, capacity for loss and need to take risk are the two that genuinely drive the right decision.

Stephen Farnfield and Ian MacKendrick, chartered independent financial advisers and expert witnesses at Paladin, explain why risk categories are so inconsistent across firms, and what deputies should actually be checking.

Why risk categories differ between firms

In practice, deputies may encounter:

• Numbered scales: for example, 1 (very low risk) through 10 (very high risk), with deputyship cases typically sitting in the middle or lower end
• Worded scales: terms such as balanced, moderate, dynamic, adventurous, or steady growth, which vary in meaning between firms

Because there’s no consistent framework, comparing two firms’ proposed portfolios purely by their risk label can be misleading. Instead Deputies should look past the label at the underlying detail, particularly how much equity content sits within a proposed investment portfolio, and how each firm’s risk questionnaire works.

The three elements of risk that actually matter

There are three distinct components that sit behind any risk conversation:

• Attitude to risk: how comfortable someone is with risk personally.This is difficult for a deputy to answer meaningfully, since it isn’t their own money, and deputies will naturally default to caution when answering on P’s behalf
• Capacity for loss: what would happen if a significant market event occurred, such as the COVID-19 market drop, and investment values fell substantially. This asks whether P could withstand that fall
• Need to take risk: whether the money genuinely needs to grow to cover a shortfall, for example where there’s a significant income gap that the fund needs to work harder to close

For deputies, capacity for loss and need to take risk are the more relevant of the three, since attitude to risk is difficult to answer on behalf of someone else.

Using a recognised benchmark to compare proposals

To make like-for-like comparisons possible, i a Deputy can ask firms to benchmark their proposed portfolio against ARC (Asset Risk Consultants), a widely used benchmark among Court of Protection deputies that defines risk categories by percentage allocation to equities and fixed interest.

Why a five-year cash buffer matters

Beyond benchmarking, a practical safeguard that should sit behind any risk decision is to ensure that as part of the advice from any IFA you’ve got at least five years of income shortfall plus planned spending plus an emergency fund all in cash, you know that as you look five years ahead, no matter what happens to the markets. 

The logic: holding roughly five years of known spending needs in cash gives markets time to recover after a downturn, so a deputy is never forced to sell investments at a loss to cover P’s near-term needs.

Why life expectancy affects the right level of risk

Life expectancy is anthother genuine factor in how much investment risk is appropriate:

• Long life expectancy (for example, a minor with a serious injury and a long time horizon): a more relaxed approach to risk can be justified, since there’s time to ride out market fluctuations, provided at least five years of expenditure is held safely in cash
• Short life expectancy (less than10 years): it becomes much harder to justify taking investment risk, since there isn’t enough time horizon to reasonably expect the market to deliver returns that outweigh the downside risk. A cash-based solution may be more appropriate

What to check before investment risk is even discussed

Before any investment decision is made, advisers should first confirm P is receiving everything they’re entitled to, since this directly affects the size of any income shortfall and therefore the risk needed to close it:

• State benefits
• Council tax reduction
• Disabled facilities grants
• NHS Continuing Healthcare (CHC) funding eligibility

The bottom line for deputies

Don’t compare risk purely by label. Ask what’s behind the number or the word, request a benchmark comparison such as ARC, confirm at least five years of known spending is held in cash, and check that life expectancy and entitlement to benefits have both been properly factored into the recommendation.