We met up with one of our experienced Investment Advisors, Christian Spiteri and delved into the advisor’s approach to investment advising and discussed the importance of understanding a client’s financial needs before investing.

Christian, can you explain the importance of understanding risk tolerance before making an investment decision?  How do you assess this and what factors do you consider in this assessment? 

For me, understanding a client’s risk tolerance is an important part of the advisory process. Assessing clients’ risk tolerance, involves understanding their willingness and ability to handle investment fluctuations.   An investor with low risk tolerance, may be more inclined to favour less volatile investments such as bonds.  An investor with higher risk tolerance may be more confident to invest in shares.  The client’s time horizon is also a very important factor to consider as this will directly affect the level of risk to take. Keeping in mind client’s risk tolerance and time horizon will avoid impulsive investment decisions, based on emotions. One of the methods used to assess risk tolerance, are risk tolerance questionnaires.  I feel it is important to dedicate time to explain to my client the important factors which influence the level of risk an investor should take.  The investor should consider the position in his/her life cycle, age, employment, time horizon, investment experience, financial situation, and investment goals.  By considering these factors, we, as advisors, are then able to tailor investment recommendations to clients to achieve financial goals and at the same time manage risk effectively.

What are some common mistakes that investors make when assessing their risk tolerance?

Throughout my experience as an Investment Advisor, I have met circumstances where investors may be extra-optimistic during bullish markets, and this may drive them to take excessive risk. On the other hand, in bear markets they tend to panic sell, resulting in moving away from the original assessment.   Conversely, underestimating risk tolerance, especially without experiencing market fluctuations, can result in overly conservative investments that may not meet financial goals. Failure to consider investment time horizons or personal factors like income stability and debt levels can also impact risk assessment.  A common mistake I have also witnessed is that clients are influenced by other investors’ behaviour, forgetting their original goals and personal risk profile. Prioritising potential profit over risk may result in unnecessary financial losses.  Other common mistakes are investment decisions led by fear, greed and emotional biases which may cloud judgement, impacting wrong investment decisions.

Could you outline types of investment products or services available to investors and how does each align with different risk profiles?

As mentioned before, it is essential to align investments with one’s risk tolerance and financial goals. Shares represent ownership in companies and offer potential high returns, but also offer higher volatility, making them suitable for adventurous investors seeking long-term growth. Conversely, bonds are debt securities providing fixed interest payments and potential capital preservation, making them ideal for those looking for steady income and less volatility. Mutual funds on the other hand give the investor the opportunity to pool investments and diversify investments across different asset classes, industry sectors and geographic regions, adapting to different risk appetites based on their underlying assets, offering certain flexibility to investors. Exchange-Traded Funds (ETFs) are like shares, offering diversification across indices or sectors.  Commodities, such as gold or oil, present high risk due to volatile prices but offer portfolio diversification for adventurous investors. Discretionary Portfolio Management provides investors with access to experienced financial professionals who can identify and seize attractive investment opportunities, act quickly in response to market changes and actively manage the portfolio on behalf of the investor with the aim of enhancing the portfolio’s performance.

What role does diversification play in an investment portfolio, and how do you advise clients on achieving proper diversification?

Diversification is vital in investment portfolios as it spreads risk across various assets, reducing overall portfolio risk. By investing in assets with low correlations, investors can mitigate the impact of poor performance in any single investment. Benefits include risk reduction, stable returns, and exposure to diverse opportunities. Advising on diversification involves determining suitable asset allocation, diversifying within each asset class, regularly rebalancing the portfolio, considering asset correlations, and monitoring performance.

How do you stay informed about market trends and economic indicators, and how does this information add value to your investment recommendations?

As an investment advisor keeping updated is a responsibility, which I take very seriously.  Keeping abreast for yourself and your clients in today’s regulated industry is a must.   I feel lucky to form part of an organisation that is committed to continuously train, update and develop its employees.  Working at MZ Investments this past year has given me the opportunity to work closely with our Research Team and Compliance Unit.  We are updated on a daily basis and periodically on market trend/dynamics, interesting data and regulation. My main priority is to provide clients with a positive experience and that my recommendations are in sync with their financial needs.  Staying updated makes my job more dynamic and interesting.

How do you approach tailor investment strategies to align with your customer goals?

Initially, I focus on understanding the client's financial goals, whether it's retirement, wealth building, or education funding. This is followed by assessing their risk tolerance through discussions and questionnaires to gauge their comfort with market fluctuations. Evaluating the client’s investment horizon helps finding suitable strategies, be it short, medium, or long term. Customising portfolio allocation involves selecting appropriate asset classes, emphasising diversification across industries and regions. I also consider their investment preferences, such as active or passive management, ethical considerations, and any restrictions they may have. A very important part of the process of advisory services is being committed to review my clients’ regular portfolios to ensure that their goals or situations have not changed. Listening to the client is very important to me.

What steps do you take to educate your clients about the investments in their portfolios and empower them to make informed decisions?

Customer Education on financial literacy is the key.  I am committed to take time to explain and ensure that the client has understood the investment well, using visuals and other IT tools make understanding easier for the client.   I go into detail with my customers on the difference between each asset class and also highlight the contribution each asset class gives to their financial goal.  Regular portfolio reviews are crucial as these give the client the opportunity to learn more about their investments on an on-going basis.  Periodic updates gives them a clearer picture of what is going on, thus empowers them to make informed investment decisions.  Financial Literacy is part of MZ Investments’ marketing strategy, with several educational initiatives organised throughout the year. These initiatives assist our clients in their investment decisions and adds value to their customer experience.

What is your approach to managing clients’ expectations during periods of market volatility or economic uncertainty?

During economic uncertainty and market volatility, times may be challenging as in this scenario both opportunities and risks exist.  It is the advisor’s responsibility to make sure that the client does not make impulsive investment decisions based on emotions.  By keeping in contact with my clients during ‘rainy weather’ gives them the reassurance, that they are being taken care of.   Business relationships are built on trust, and it is during economic uncertainty, when clients need us most.   During challenging times in financial markets, I believe in supporting the client by providing reassurance and holding on to the original recommendation and long-term goals.  During market volatility, clients’ expectations are managed through encouragement, patience, and investment discipline.  In a nutshell, I believe that the right approach is being proactive in your communication with the client, providing realistic expectations, long-term focus and  diversification, being patient, and  providing ongoing support throughout all cycles.

What advice would you give to a new investor who is just starting to work with a financial advisor, and what questions should they ask to ensure they are making informed decisions?

Before investing, a new investor should define financial goals such as retirement, wealth building, or education funding. Next, inquire about the advisor's investment approach and portfolio construction methods, ensuring they align with personal investment objectives and risk tolerance. Discuss performance expectations, communication frequency, and the scope of financial planning services offered. I advise that the client understands how the advisor manages investment risk and market downturns.     I feel it is important to educate a new investor to build savings for the short-term, before taking up any long-term investments.  This may avoid disrupting long term investments if an emergency expense arises in the future.

How do you contribute to the quality of services MZ Investments provide to clients?

I focus on being compliant and building strong relationships with all my clients.  This is based on trust and good communication.  I continuously strive to offer the best tailormade service in line with MZ Investments’ Mission Statement and the client’s financial circumstance.  By being able to offer well-structured investment strategies, asset allocation models and educating the client in financial literacy gives me great job satisfaction.  Fostering a business atmosphere where the customer feels at home is key to MZ Investments and its team.

MZ Investments is regulated by the Malta Financial Services Authority and  licensed to conduct investment services business in terms of  the Investment Services Act (Cap. 370 of the Laws of Malta).This article is intended for information  purposes only and should not be construed as investment advice.