A worrying number of advisers have only a vague notion of the meaning of capacity for loss and some have it totally confused with the psychological concept of risk tolerance, as we discovered in research for our recently published white paper, Retirement income provision in a post-pension freedoms world .
The regulator defined capacity for loss in a footnote to FG 11-05 Assessing suitability: Establishing the risk a customer is willing and able to take and making a suitable investment selection.
“By ‘capacity for loss’ we refer to the customer’s ability to absorb falls in the value of their investment. […]
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