Determining Customer Objectives - Financial Considerations

Continuing with our example, the only troubling thing is that the prospect seems to be underinsured. In your capacity as a registered representative, it would be your duty to ensure your client has adequate life insurance and disability coverage before you suggest stocks, debt securities, mutual funds, options or more exotic instruments.

  • Another important financial consideration hinted at in this example is home ownership. A home is like a six-digit savings bond that needs new shingles. Not only does it enhance an individual's net worth, it also improves her creditworthiness because it can be used as collateral if the owner needs to borrow money to cover debts.

  • Other financial considerations are the prospective client's creditworthiness, as reflected in a credit report from a source like Equifax, Experian (formerly TRW) or TransUnion.

    • These credit bureaus - not really government agencies, but private companies that like to call themselves bureaus - examine a person's history of paying her debts and write up reports that are available, for a fee, to anyone who might enter into a financial relationship with the subject.

    • The cornerstone of a credit report is the Fair Isaac & Co. (FICO) score, which purports to measure a credit user's likelihood of paying a bill. An individual's FICO score is dependent upon the data fed into the model; each credit bureau has access to different information, so one person's FICO score will typically vary from bureau to bureau. The exact formula for FICO calculation - which serves as the primary consideration for determining who will receive a loan and at what rate and who will be denied funding - is a closely guarded secret, and the Federal Trade Commission is OK with that.
    • Not surprisingly, creditworthiness is a key consideration when screening a potential client for a margin account.

  • Tax status is another financial consideration that will influence your recommendations. The higher a potential client's tax rate, the more likely she will be to want to invest in tax-free or tax-deferred instruments. Also, the higher the tax bracket, the less appealing high-dividend stocks appear.

Nonfinancial Investment Considerations
There are several non-financial investment considerations to look at as well. Age is probably the most obvious. Investment strategies have a well-established timeline, with four potentially overlapping phases:

  1. Accumulation
  2. Consolidation
  3. Spending
  4. Gifting
Determining A Client's Risk Tolerance
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