Determining Customer Objectives - Investment Objectives

Client's investment objectives are closely tied to their risk tolerance. Their appetite for risk is often a factor of the following:

  • Age
  • Marital status
  • Family responsibilities
  • Education
  • Investment experience

Typically, the older a client gets and the greater the number of people who rely on him or her for support, the more averse he or she will be to risk. Offsetting that, education and market savvy tend to demystify some of the perceived risk in a brokerage account and render the client more risk tolerant.

There are two important points to remember here:

  1. First, the factors listed above change over time, so do not assume that someone who was writing uncovered calls last year will want to play the zero-sum game of options speculation forever.

  2. Second, as a registered representative, it will be your responsibility to provide your client with options that suit every stage of life and corresponding risk tolerance level

Investment Objectives
There are four basic investment objectives:

  1. preservation of capital,
  2. current income,
  3. current growth and
  4. total return.

Preservation of Capital
Wealthy clients and those in the spending and gifting phases are most interested in preservation of capital. This is the most conservative investment strategy, and it is intended solely to avoid risk of loss. Less risk, of course, means less return. Low-yielding bonds and money market funds are the foundation of a capital preservation strategy.

Current Income
Conversely, current income is the strategy focused on getting returns on investment as quickly as possible. High-interest bonds and high-dividend stocks are its mainstays.

Current Growth
The current growth strategy is intended for investors with time to "get in on the ground floor" of the "next big thing". As risky as that sounds, it is not a bad strategy for someone who understands the potential downside.

Investing in any one growth stock is adventurous, but the idea is to collect an array of these emerging stocks - generally shares of small companies in new businesses - in a portfolio. The expectation is that a couple of these investments will turn out to be blockbusters, which will more than offset the ones that crash and burn. A growth stock generally does not offer a dividend, and the entire payoff with this strategy is in selling it years from now for many multiples of what you paid for it today.

Total Return
Total return investing factors in both capital appreciation - how fast the share price grows - and dividend yield. It also considers the tax implications for the individual investor: a tax-free return of 5% is as good as a taxable dividend of 7% to someone in the 40% bracket. Total return is sometimes called growth-with-income.

Just as clients do not necessarily fit into convenient investment phases, they tend not to have just one objective. Your goal should be to blend all their objectives proportionately into their individual portfolios..

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