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

    How FICO Scores Are Calculated

    Lenders look at this to determine your credit risk. We explain what it is and how it's figured out.
  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. 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.
  6. 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.
  7. Managing Wealth

    Can You Hit The Highest Credit Score?

    Yes – it's doable. But the real question is, does it matter?
  8. 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.
  9. Investing

    What Is The New 'FICO Score 9' And Its Benefits?

    A change in how some credit scores are calculated might soon make it easier for some homebuyers and homeowners to get a mortgage.
  10. 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.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center