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

Related Articles
  1. Personal Finance

    Fico vs. Experian vs. Equifax: Their Pros and Cons (FICO, EFX)

    FICO, Experian and Equifax all provide information about a borrower's credit history. However, important differences exist between the three companies.
  2. Personal Finance

    Meet The Company Behind Your FICO Score

    There are other credit scores that evaluate lending risk, but FICO is still the choice of most U.S. lenders.
  3. Personal Finance

    More Banks Offer Free (Actual) FICO Scores

    Lenders overwhelmingly use the FICO credit score when it comes to determining creditworthiness. And thanks to a new initiative, consumers can see it too.
  4. Personal Finance

    Understanding Your FICO Score

    Lenders use the FICO score to assess a loan applicant’s credit risk.
  5. Managing Wealth

    Can You Hit The Highest Credit Score?

    Yes – it's doable. But the real question is, does it matter?
  6. Investing

    5 Things You Need For A Good Credit Score

    How good a credit score you have depends on 5 factors. What they are and what it takes to better your credit rating if it's not as high as you'd like.
  7. Personal Finance

    Common Things That Improve And Lower Credit Scores

    Credit scores are used by lenders to estimate credit risk. Find out how you can better earn the trust of lenders and reap the benefits.
  8. Financial Advisor

    How to Build a Credit Report for Your Adult Child

    They may not be true adults yet, but you can start building a credit history for your young adult children now.
  9. Personal Finance

    What Is the Lowest Credit Score?

    Learn about the different types of credit scores available to borrowers, and find out about the lowest scores under each one of those credit scores.
  10. Personal Finance

    Top Places To Get A Free Credit Score Or Report

    When's the last time you checked your credit report? With all the hacking out there, don't wait for the car dealer to find problems when you need a loan.
Frequently Asked Questions
  1. What are the different types of costs in cost accounting?

    Cost accounting aids in decision-making processes by allowing a company to evaluate its costs. Some types of costs in cost ...
  2. What are the maximum Social Security disability benefits?

    The average Social Security disability benefit amount for a recipient of Social Security Disability Insurance (SSDI) in 2 ...
  3. Do long-term bonds have a greater interest rate risk than short-term bonds?

    There is a greater probability that interest rates will rise within a longer time period than within a shorter period. One ...
  4. How does leverage work in the forex market?

    Investors use leverage to significantly increase the returns that can be provided on an investment. They lever their investments ...
Trading Center