Current Status
Before you can help clients meet their goals, you must have a good grasp of their current financial situations. It can be useful to create worksheets to capture the following information:

  • Income
  • Expenses
  • Assets
  • Liabilities
  • Tax issues

Financial Goals
"Financial goals" refers to general investment objectives, not the client's specific needs such as retirement at a certain age or college plans for his/her children (see the next section on capital needs). However, there is certainly a correlation between the two, and it is useful to know the characteristics of each of these investment goals:

  • Preservation of capital - The investor is more concerned with safety than with return. Treasury bills and money market funds may be most appropriate.
     
  • Current income - The investor needs a portfolio that produces steady income for current living expenses. Bonds, annuities, and stocks with high dividends (such as utility stocks) may be appropriate.
     
  • Growth and income - The investor is looking for a portfolio that generates some income, but he/she is looking for capital appreciation as well (often for protection against inflation). Appropriate investments could include a mix of bonds and stocks.
     
  • Growth - The investor's goal is likely retirement or another event in the future, where current income is not needed. A diversified stock or mutual fund portfolio is appropriate.
     
  • Speculation - The investor is looking for high-risk investments with a potential for very large returns. This is rarely the goal for an entire portfolio, but rather for a specific portion of assets. Aggressive growth funds and small-cap issues may be most appropriate.

Exam Tips and Tricks
Consider this sample exam question:

Each of the mutual funds below might be suitable for an investor primarily seeking income investments EXCEPT:

  1. government bond fund.
  2. balanced fund.
  3. sector fund.
  4. money market fund.

The correct answer is "c", since sector funds contain only stock investments and are primarily growth-oriented.

Capital and Other Needs, Current Investments and Risk Tolerance

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