Risk.

Mere mention of the word is sufficient to send clients scurrying for the nearest exit and partners reaching for their indemnity policies.

The solicitor investment manager is ideally equipp ed to balance an acceptable risk level with sensible targets for reward.Ideas of what constitutes high or low risk can vary enormously.

Many of the clients of long-established law firms have 'traditional' investment portfolios which they have inherited or which are held in family trusts.

More often than not, these will consist of some British government stock and a small selection of equities.

Frequently, a 'portfolio' will have just one or two equities - a massive holding of Shell perhaps or a couple of bank holdings.

The client has held the shares for years and does not regard them as any sort of 'risk'.But having regard to the compliance manuals, no matter how much of a household name the company might be, the ordinary share comes very much at the top end of the risk category, as it should.

As a short term investment, the ordinary share can be extremely volatile; and even as a long term investment, there is no guarantee that the investor will not lose all his or her money.

Queens Moat Houses had been on several stockbrokers' tip sheets until shortly before its price was suspended; those with longer memories will recall Mersey Docks and Harbour and the original Burmah Oil stock which had similarly been regarded as 'blue chip' investments but whose value all but disappeared overnight.

Maxwell Communications and Polly Peck are simply more recent examples.Despite all this, persuading clients that they should reduce their stakes in long-held companies can provoke opposition, if not anger.

The potentially much safer route of a unit trust with its huge spread of investment risk is often viewed with suspicion (sometimes with justification, depending on the trust).

At the other end of the scale is the client whose idea of high risk is to put some of his or her savings in one of the lesser known building societies.

The investment for this client is simply something which will bring in a good rate of interest whilst the capital does absolutely nothing.This is where the importance of the 'know your client' requirements comes to the fore.

It is vital that the investment adviser understands what his or her client perceives as risk.

Solicitors generally know their clients very well and a few minutes talking to the partner or fee-earner who has introduced the client can give the investment adviser an invaluable insight into the risk category of the client.

This helps when completing the fact-finding questionnaire and can avoid the wrong messages being sent to the client at the first meeting with the adviser.If the investment manager could be sure of picking investments which always produced a healthy income and also made handsome profits, then risk assessment would have little relevance.

But if it were that easy, the investment adviser would not exist.

When it comes to investment, risk and reward tend to go hand in hand.So, should investment advisers simply shop around for the best bank or building society account, meaning the safest one offering the most attractive interest rate? For a few clients, particularly those with comparatively little to invest and a short investment timescale, the answer may well be yes.

For the sort of client who is looking to use the investment management services of a law firm, however, such a solution is unlikely to be sufficient.

Experience shows that greatly superior total returns (ie the combination of income and capital growth) can be achieved by including more adventurous investments in a portfolio.

Furthermore, in times of high inflation, investors have seen the real value of cash-based investments seriously eroded.

There can therefore be a risk to the client in not investing in equity markets.In most cases, a balanced approach will be appropriate.

A typical portfolio might contain some cautious items such as building society accounts, short-dated gilts, etc for security and peace of mind; a selection of blue chip UK equities for capital and income growth; and some specialist collective funds covering overseas investments, emerging markets, commodities even.

There is also usually a place for seemingly humble items such as National Savings certificates offering certainty, tax exemption and, for the high rate taxpayer in particular, often quite respectable returns.

Protection against inflation can be obtained by choosing index-linked gilts or National Savings.It has to be remembered, however, that most clients will not be choosing investments.

The client's choice was in the investment adviser.

They therefore trust him or her to make the right decisions and, provided that the adviser adopts a sensible approach and is able to support this with efficient administration, he or she is likely to have a satisfied client.

This does, however, place a responsibility on the investment manager to ensure that the policy he or she is following is appropriate for the needs of the client.The fact find which established investment criteria will be seriously out of date five years later unless it has been kept under constant review.

Clients' circumstances change: they may be nearing retirement, about to receive an inheritance, approaching the stage where nursing home fees have to be funded, have dropped into a lower tax bracket, etc.

It is vital that the adviser keeps in regular contact with his or her client, not only by sending paperwork to satisfy the compliance requirements but also by maintaining a dialogue.

In this way, the adviser will keep right up to date with the client's situation and requirements and ensure that the correct risk-reward balance is maintained.Some investments clearly carry greater risk than others.

Clients have to be made aware of this even to the point of making them confirm in writing that, despite advice to the contrary, they wish a particular investment to be acquired or retained.

Otherwise, the adviser may be at risk.The investment manager should be able to demonstrate that the investment selected for a client fits in with the appropriate investment strategy for that client and represents good value, given the information which he or she might reasonably be able to obtain on it.

In the case of gilts and other fixed-interest investments, an opinion will have to be formed on the inflation trend and the likely movement of general interest rates.

The marginal tax rate of the client will also be important as will the redemption date of the stock.

Choosing loan stocks involves assessing the security of the borrower and its ability both to make the interest payments and to repay the capital in full.Equity selection is perhaps more of an art.

Whilst there is scope, however, for individual flair in choosing equities, it is a confident adviser who believes that he or she always knows more about the true value of a share than the market has decided.

The price of a share is affected by supply and demand and, given the universal availability of information on the most frequently traded stocks, demand changes according to the market view of the stock.

For every buyer, there must be a seller, the one hoping the share is 'cheap', the other hoping the right time has come to take the profit.

Time will tell which one is rig ht.Some would argue that efficiency of stock markets makes research-based equity selection by investment managers a somewhat futile exercise and that they would do just as well sticking a pin in the financial pages on the basis that it is 'all in the price'.

However, such a policy is unlikely to satisfy the requirements of the Law Society's monitoring officer.

Furthermore, the market is by no means wholly efficient and a good investment manager is endeavouring to pick stocks which will out-perform and to consolidate gains by taking profits.

Above all, he or she can reduce risk by ensuring that there is a sensible investment spread in the portfolio.Just as it is unwise to have everything in one investment, risk is increased if investment is concentrated in one sector of the market.

By choosing companies from various investment fields, whilst the portfolio will not be protected from a general market fall such as the 1987 crash, it will be cushioned from problems experienced by one sector of the market.

The risk element can be further managed by having a core of solid, if unexciting, holdings supplemented by a suitable proportion in one or two 'spicier' stocks.In the same way, unit trusts and investment trusts represent a sensible solution when it comes to investing in specialist markets.

Choosing individual stocks in overseas countries, for example, can represent very high risk; the shares can be expensive to hold and deal in, and reliable up-to-date information may be scarce.

Therefore, whilst the inherent charges in the unit trust may be offputting as far as investing in UK blue chips is concerned - provided sufficient funds are available, the investment manager should be able to manage direct investments at considerably lower cost - the professional services and the enormous resources of the unit trust or investment trust come into their own where higher risk securities are involved.The adviser aims to control risk here by choosing funds offered in growing markets and looked after by managers with good track records in their particular field.

Income yields are often low but for the right investor the exceptional growth potential of such funds will mean they will often have a place in the medium-to-larger size portfolio.In recent years, derivatives have become a feature of the investment world, both as investments in their own right and to provide a measure of insurance to cover existing, more conventional investments.

So-called hedging of funds may be arranged through options, perhaps to protect an existing large capital gain against a major fall in the market.

Some of these arrangements are quite sophisticated but they can represent a useful element in a risk management strategy.

To that extent they can be seen as a way of reducing risk in the portfolio; however, as investments in their own right, they can be very highly geared and therefore extremely high risk.Apart from the risk to the client, it should not be forgotten that the adviser or manager is also at risk if he or she fails to perform his or her responsibilities correctly.

Few investments offering attractive returns are 'guaranteed' and it would be unreasonable for the adviser to be accountable for the losses which are sustained from time to time in the best-managed portfolios.

However, the manager who ignores compliance procedures, the restrictions imposed by his or her client or, in the case of a trust, the investment powers under the will or trust deed, is inviting a claim from the client and punishment by the regulatory body.The solicitor investment manag er, with high standards of client care, genuine concern for the well-being of the client and, above all, an understanding of what makes his or her client tick, has little to fear and much to gain.