Determining Customer Objectives - Determining A Client's Risk Tolerance
An investor in her 20s or early 30s is in what is known as the accumulation phase.
- Her net worth is probably fairly small and burdened by car and student loan debt.
- She might not have money, but she does have one important commodity: time.
- Someday, she may want to have children, send them to college and then retire.
- But once her immediate investment goals are met - car, down payment on a house - she will still have a long time horizon on her other investments.
- She will be most interested in growth and can make some fairly high-risk investments with the expectation of making above average returns.
In her mid-30s, the investor will typically move into the consolidation phase.
- She will likely stay in this phase through her peak earning years, until just before retirement.
- At this stage, her debts should be nearly paid off, her children's college expenses should be funded and her earnings should exceed her expenses.
- Retirement and estate planning are her biggest concerns.
- Through most of the consolidation phase, she will still have a decade or two to consider these big-ticket items, so she will still have a moderate tolerance for risk.
As the investor approaches retirement, she enters the spending phase.
- Between Social Security, pensions and interest in other retirement accounts, she has her daily living expenses covered, provided she is invested to receive a steady, predictable income.
- She has no need to speculate aggressively and desires no financial surprises: the worst that can happen is that she could lose her entire nest-egg; the best that can happen is that she will leave her heirs more of the money she never had a chance to spend on herself.
- It follows, then, that she is likely to be more risk-averse at this point. Her biggest concern is inflation, and she must incur some degree of risk to cover a potentially shrinking dollar.
- If the investor is fiscally well-situated, the spending phase might coincide with the gifting phase, during which she will provide for friends and relatives or set up philanthropic trusts. She might also look into trusts as a tax shield as she plans her estate.
Of course, this is an ideal, metaphysical investor. She does not exist. Not everybody knows that, the week after they graduate from school, they are supposed to start accumulating long-term, high-risk instruments. That throws off the whole timeline. As an investment professional, you must be able to make sound judgment calls as to which phase matches the client's situation most closely, while being aware that elements of other phases may enter into the equation.Questions To Ask Your Client
ProfessionalsTake a look at five primary reasons why financial advisors still choose to recommend mutual funds over other types of investment vehicles.
ProfessionalsDiscover more about the responsibilities of an internal advisor consultant, the average salary he can expect and the qualifications he will need for the job.
BrokersIndependent broker-dealers are a great choice for experienced, self-starter planners who have established practices.
Personal FinanceRIAs and brokers are held to different standards when providing investment advice. Here's how they differ.
Trading Systems & SoftwareLaunching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
ProfessionalsLearn how to answer option questions on the Series 7 exam. Pass your Series 7 exam with the help of these tips.
ProfessionalsFINRA Series 55 Exam Guide
ProfessionalsFINRA Series 62 Exam Guide
ProfessionalsFINRA/NASAA Series 99 Exam Guide
ProfessionalsFINRA/NASAA Series 65 Exam Guide
- No results found.
The exact nature of a financial advisor's job responsibilities determines whether he must have a Series 7 license. If a financial ... Read Full Answer >>
Financial advisors must possess various securities licenses in order to sell investment products. The specific products an ... Read Full Answer >>
The Financial Industry Regulatory Authority (FINRA) offers a variety of licenses that must be obtained before conducting ... Read Full Answer >>