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.



Tax Issues

Related Articles
  1. Tech

    Tips for Assessing a Client's Risk Tolerance

    Determining a client’s risk tolerance is a critical piece of the puzzle in designing and appropriate asset allocation.
  2. Financial Advisor

    What Is Your Client's Willingness and Ability to Take Risk?

    Financial advisors must carefully consider a client's willingness and ability to take investment risks, including tax concerns and liquidity needs.
  3. Financial Advisor

    The Importance of a Client's Risk Assessment

    Financial advisors and money managers must do a detailed risk assessment regarding each client before they can recommend a course of action.
  4. Financial Advisor

    Pro Tips on Evaluating Clients' Risk Tolerance

    Want to keep clients longer? Bolster your risk assessment capabilities.
  5. Financial Advisor

    Investing Other People's Money: 5 Things You Must Know

    Learn the five things an advisor should know before investing another person's money, with a focus on the FINRA "know your customer" rule.
  6. Financial Advisor

    Manage Your Clients' Expectations

    You can't control how they react to the market, but you can help them understand the reality of the situation.
  7. Financial Advisor

    Risk Tolerance: Why Advisors, Investors Mess It Up

    Quantifying the amount of risk that a client is willing to take can be a deceptively difficult task. Here's why.
  8. Financial Advisor

    Advisors: Revisit Your Client's Risk Assumptions

    Financial advisors should avoid generalizing a client’s risk tolerance based on their age or other demographics.
  9. Financial Advisor

    Retirement Investing Strategies for People in Their 60s

    Here are four things clients in their 60s need to consider when it comes to retirement planning.
  10. Tech

    Advisors Need to Talk Less, Ask and Listen More

    Financial advisors spend a lot of time giving their clients advice on how to invest their money. But what they often forget to do is listen.
Frequently Asked Questions
  1. How do you calculate r-squared in Excel?

    Calculate R-squared in Microsoft Excel by creating two data ranges to correlate. Use the Correlation formula to correlate ...
  2. What is the Difference Between International Monetary Fund and the World Bank?

    Learn about the International Monetary Fund and the World Bank and how they are differentiated by their respective functions ...
  3. Where Did the Bull and Bear Market Get Their Names?

    The terms bull and bear are used to describe general actions and attitudes, or sentiment, either of an individual (bear and ...
  4. What's the difference between Google's GOOG and GOOGL stock tickers?

    Learn the difference between Google's GOOG and GOOGL ticker symbols. Splitting shares into classes prevents management from ...
Trading Center