Capital and Other Needs
The client's specific goals should be discussed in detail. While the need for retirement and college funding is nearly universal, be sure to probe for other goals such as starting a business, helping other family members or buying a vacation home. A key consideration for any of these goals is the time horizon, which affects both the choice of investment strategy and the amount of annual savings needed to reach the goal. Other needs must be discussed and planned for as well, including the following:

  • Emergency reserves - While three to six months' living expenses are considered standard for emergency savings, other factors could dictate a larger or smaller need for liquid savings.
     
  • Life insurance - If the client has a family whose income needs cannot be met through current assets, life insurance is needed. The total amount and type of insurance would depend on client circumstances.
     
  • Other insurance - The IA should review the client's disability and health insurance coverage, since any investment or estate plans could be disrupted if this coverage is inadequate.

Current Investments
Before making investment recommendations, it is important for the IA to understand the client's current holdings and what strategies were used to create them. The client may wish to liquidate some or all of these holdings and reinvest in a new portfolio, or he or she may want to retain all current holdings. The IA must consider these matters before making recommendations.

Risk Tolerance
A primary consideration in recommending suitable investments is an understanding of the client's risk tolerance. If a particular client is uncomfortable with the inherent risk of a growth portfolio or of a specific investment option, it is not suitable - even if it appears to match the client's time horizon and financial goals. Of course, an IA may try to educate the client as to risk/reward tradeoffs and the history of similar investments, but the client is the final arbiter of how much risk he or she is willing to take.

Many investors do not understand how to determine the level of risk their individual portfolios should bear, the article Determining Risk and the Risk Pyramid discusses how one can determine his or her risk preference, and how the risk pyramid is useful in devising an appropriate asset mix.

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