Capacity for Loss

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Clients keep too much money in cash because:

  1. They do not understand how to get the best value from it.
  2. They trust their bank or building society is looking after them and their money properly.
  3. They are afraid of too much risk.
  4. They do not understand the correct balance between cash and investments.
  5. They are afraid of running out of cash, etc.

An Effective Cash Management Proposition
clearly enhances a Capacity for Loss policy
as a client's capacity for loss will change if they understand
the value of their cash.

A client's Capacity for Loss is dependent upon a number of factors, which include:

  • Their income
  • Their lifestyle
  • Their expenditure
  • Their fear of losing capital, AND
  • Their understanding of the value of cash, AND
  • Their informed understanding of how much money they need to retain in cash

Culminating in a measure that determines the amount of capital they can lose before it has an impact on their lifestyle or their mental health, which, demonstrating the value of cash significantly helps.

If the cash is held in dormant savings accounts, a client will generally hold more on deposit than is really necessary. Whereas, if the cash is managed effectively, to maximise its value, the client will have a better understanding of their requirements and will more often than not, realise they have a greater Capacity for Loss than they first realise.

This completely changes the suitability of the advice, which puts both the client and the financial adviser in a much stronger position.