Architas has urged advisers to check their capacity for loss measures and how they communicate these with their clients.
Research by the firm found nearly half of advisers think the Financial Services Authority's guidelines on capacity for loss need further clarification and 24 per cent found them confusing and admitted they covered the topic under 'appetite for risk'.
Capacity for loss is a term used to demonstrate to clients the potential impact of a loss on their investment and how it would affect their standard of living.
Architas has suggested that capacity for loss should not be included within the same section as risk appetite as the two are distinct issues.
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It suggested cashflow planning would be a good way of demonstrating the effect of losses to consumers and that non-financial issues such as lifestyle and wellbeing should also be considered. Capacity for loss should be reviewed on a regular basis and specific reference should be made to it within any client correspondence regarding investment choices.
Caspar Rock, chief investment officer at Architas, said: "From our research and our dealing with advisers, it is clear that more needs to be done with respect to capacity for loss. The FSA have identified it as an area of interest to them, but it has not offered evidence of best practice as to how it should be documented or presented from a compliance perspective.
"Our intention is to draw attention to this area of investment suitability and ensure that advisers are better equipped to discuss this with clients."

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