Risk Profiling
A broader approach to risk profiling, combining asset allocation, investment objectives and volatility measures to support clearer suitability decisions.
Why Aristo Capital Takes a Different Approach to Risk Profiling
At Aristo Capital, we recognise that advisers need clarity and a robust framework when assessing portfolios against client risk profiles.
Standard deviation is familiar, but it has material drawbacks when treated as the primary measure for mapping risk profiles to portfolios. That is why we use a broader approach to assessing portfolio risk characteristics.
The Limitations of Standard Deviation in Risk Profiling
Standard deviation is commonly used in attitude-to-risk frameworks to measure how much returns have fluctuated. But it is highly dependent on the period selected: a portfolio can look meaningfully more or less volatile over one year than over ten. Results also vary because risk tools use different data sources and calculation methods, so the same strategy can be placed in different risk bands, depending on the risk profiler used or when the portfolio risk was measured.
Standard deviation is backward-looking and purely statistical: it does not explain what drove volatility, how a portfolio is constructed, or how it is meant to be used within a client plan.
In certain environments, bond-heavy portfolios can behave in ways clients may not expect, while equity-led portfolios can appear temporarily calm. The result can be risk labels that obscure the portfolio’s risk and negatively impact the client outcomes.
Our Philosophy: Aligning Portfolios with Purpose and Allocation
Rather than anchoring portfolios to a single volatility score, we start with asset allocation and the investment objective.
Over the long term, we consider the split between growth assets (e.g., equities) and defensive assets (e.g., bonds and cash) to be a more informative indicator of portfolio behaviour than a standalone volatility metric. Our portfolio labels reflect growth asset exposure, giving advisers a clear way to describe positioning across market conditions.
Each Aristo Capital portfolio has a defined role, capital growth, income, or a balance of both. We believe suitability assessments are better informed when advisers consider a client’s intended use of funds alongside the portfolio’s objective and asset allocation, rather than relying on standard deviation alone.
Allocation
What This Means for Clients
By placing greater emphasis on strategic asset allocation and investment objectives alongside traditional risk measures such as standard deviation, we aim to provide portfolios that are easier to position within the suitability process and more closely aligned with their intended long-term investment outcome.
Standard deviation is not a static measure and will naturally rise and fall as market conditions change. Asset allocations, however, are deliberately constructed and maintained through portfolio rebalancing. In practice, a client’s strategic allocation often remains appropriate despite changes in measured volatility. This can reduce the risk of clients being moved between portfolios solely because of changing market conditions rather than a material change in their objectives, time horizon, capacity for loss or overall circumstances.
While standard deviation remains an important portfolio metric, we believe that asset allocation and investment objectives provide a more stable framework for portfolio construction, oversight and suitability assessment over the long term.
