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..



Depreciation

Related Articles
  1. Tech

    Tips for Assessing a Client's Risk Tolerance

    Determining a client’s risk tolerance is a critical piece of the puzzle in designing and appropriate asset allocation.
  2. Financial Advisor

    What Is Your Client's Willingness and Ability to Take Risk?

    Financial advisors must carefully consider a client's willingness and ability to take investment risks, including tax concerns and liquidity needs.
  3. Financial Advisor

    The Importance of a Client's Risk Assessment

    Financial advisors and money managers must do a detailed risk assessment regarding each client before they can recommend a course of action.
  4. Investing

    Having A Plan: The Basis Of Success

    It ensures that you have a realistic outlook, and a solid strategy. We show you why and how.
  5. Financial Advisor

    Investing Other People's Money: 5 Things You Must Know

    Learn the five things an advisor should know before investing another person's money, with a focus on the FINRA "know your customer" rule.
  6. Trading

    What Is Your Risk Tolerance?

    Forget the cliches and uncover how much volatility you can really stand.
  7. Investing

    Understand Your Role In The Investing Process

    Knowing what to expect when managing your assets will help you achieve your financial goals.
  8. Financial Advisor

    How to Manage a Client's Return Expectations

    One of the most critical functions of an advisor is to set realistic return expectations for their clients. Here are some ways to achieve this.
  9. Financial Advisor

    Manage Your Clients' Expectations

    You can't control how they react to the market, but you can help them understand the reality of the situation.
Frequently Asked Questions
  1. How do you calculate r-squared in Excel?

    Calculate R-squared in Microsoft Excel by creating two data ranges to correlate. Use the Correlation formula to correlate ...
  2. What is the Difference Between International Monetary Fund and the World Bank?

    Learn about the International Monetary Fund and the World Bank and how they are differentiated by their respective functions ...
  3. Where Did the Bull and Bear Market Get Their Names?

    The terms bull and bear are used to describe general actions and attitudes, or sentiment, either of an individual (bear and ...
  4. What's the difference between Google's GOOG and GOOGL stock tickers?

    Learn the difference between Google's GOOG and GOOGL ticker symbols. Splitting shares into classes prevents management from ...
Trading Center