Every client who walks into a financial planner's office has dreams and goals. The job of the planner is to first discover what those goals are, and then create a plan to make them a financial reality. Unfortunately, not all clients walk in with a clear picture of where they want to be 10 or 20 years down the road, they may have a vague idea but they're unable to translate this into practical numbers of any kind. This is where financial planners work their magic: providing clients with a sense of where they are now in relation to their goals.

In this article we'll take you through a common scenario to illustrate the important pieces of information to listen for when you first meet with a client. We'll then show you how to quantify this profile so you can begin to formulate a plan for your new client.

Building a Profile
During your opening conversations it's important to glean as much information as you can about your client's true goals. As the conversation unfolds you should unobtrusively jot down follow-up questions that spring to mind. Writing them down allows you to let the conversation flow naturally without interruption, while assuring that you won't forget an important point later. Let's look at a brief example.

Betty walks into your office for your first meeting together. She was recommended to you by Albert, another client. Albert told you that she loves to talk about sailing, but he didn\'t mention much else. As she sits down you note that she is smartly dressed and looks to be in her mid-50s. After the initial introductions and pleasantries you get down to business.
You: "So, have you thought about what you\'re going to do once you retire?"
Betty: "Oh, a little bit… I\'d like to travel, and maybe sell my house, so I could get one that only has one level. I suppose those are pretty typical things, but aside from that I haven\'t made any plans."
You: "What made you decide to come see me?"
Betty: "My company has a retirement plan that I\'ve been paying into for years. I hadn\'t really paid attention to it, but I just got a promotion and decided maybe I should start contributing more. Retirement is still a ways down the road for me, but I though I better get a real plan in place now or else the only beaches and sun I\'ll see will be on TV."
You: "Albert mentioned to me you love to sail, too."
Betty: "Oh, yes, I did a lot of sailing when I was young, and I\'ve always wanted to own a small luxury boat of some sort and maybe go sailing around the Mediterranean…"

If Betty were your client, you would now have several issues to determine before you would be able to tell whether she will be able to fulfill her wishes. Here's a list of questions that should have come to mind.

  • You assume she is in her mid-50s, but what is Betty's exact age?
  • When does she want to retire?
  • She mentioned selling her house; what is its value, and is the house paid off?
  • How much does she want to spend on a new house? Will she need to dip into savings?
  • She mentioned having retirement savings - what is the total value?
  • What is her retirement plan invested in?
  • She just got a promotion; what is her current salary?
  • How much can she now afford to contribute to her plan?
  • Is she properly insured, and can she continue to pay for adequate coverage?
  • She wants to sail; how much will the boat she wants cost?
  • How much investment risk and volatility is she willing to accept to get where she wants to go?

After your follow-up questions, you learn that Betty has $100,000 in retirement savings and $50,000 in liquid assets. Her retirement plan is invested mostly in bonds, with moderate equity exposure. She has about $50,000 left to pay on her house, with no other debt. Her big promotion means she is currently earning $75,000 a year and wants to max out her retirement plan contributions. Finally, she is currently 55 years old and plans on retiring to the Mediterranean in about 10 years. The boat she wants is no dinghy at a cost of $100,000. (For related reading, see Five Retirement Questions Everyone Must Answer.)

Crunching the Numbers
We can begin answering these profile questions by running a few time-value-of-money calculations. In this case, we'll need to consider the potential value of her retirement plan upon retirement, the value of her house, potential cost of the boat, potential Social Security income and an estimate on how much income she'd receive and whether that amount would be enough to provide the quality of life she wants after retirement.

  • Retirement Plan Value: Assume that Betty contributes 15% of her income (currently $75,000 x 15% = $11,250) to her 401(k) for the next 10 years, she will then have approximately $350,000 in her retirement plan at age 65, assuming that the assets grow at a hypothetical rate of 7% per year (and that her initial balance of $100,000 grows at this rate as well).
  • Housing Situation: Betty stated that she would like to move into a one-level home at some point. However, you've discovered that her current home is only valued at $110,000. Depending on market prices in 10 years, she might have to inject additional cash into the purchase of another house - unless she is willing to settle for a very small one (or her existing house's value increases substantially). At that time, this money could come from her non-retirement savings of $50,000, but she may be loath to deplete her emergency cash reserve this way. There is also the possibility of her selling her current home and simply living full-time in her boat. (For alternative housing suggestions you could make, check out Is A Housing Co-Op Right For You? and Does Condo Life Suit You?)

    For the purposes of this article, let's assume that Betty is able to find another home that she likes for the same price as her current residence. In this scenario, she would have $350,000 in retirement savings to buy a boat and live on for the rest of her life.

  • Buying a Boat and Potential Retirement Income: If an adequate boat costs $100,000, then she is left with $250,000 to live on. At a hypothetical rate of 6%, she will receive $15,000 a year without touching the principal. Of course, she will be eligible for Social Security benefits as well, which for simplicity will be assumed to be $700 per month. This brings her total hypothetical income to $1,950 per month ($15,000 / 12 months = $1,250 + $700). The question is, will she be able to travel and live comfortably on this amount? Will she be able to pay for adequate health and long-term care coverage this way? Betty's life expectancy should also be considered here. Both mortality statistics and her family's medical and longevity history should be used to make a sound estimate. (For related reading, see Boomers: Twisting The Retirement Mindset.)

Asset Allocation and Time Horizon
The factors listed above clearly illustrate that Betty will likely need more money at retirement than what is projected. In order to rectify this situation, one or two different measures can be taken. The first possible solution would be to increase the equity exposure in Betty's retirement portfolio to increase her rate of return. If her portfolio were to grow by an average of 9% per year, then her plan would be worth approximately $407,000 at retirement. However, Betty may not be willing to assume the level of risk that is necessary in order to achieve this rate of return. A psychological profile should created to determine how much risk Betty is comfortable with. For example, if Betty cannot accept a possible 15% drop in her portfolio's overall value at any time, then she is probably better off staying with her current asset allocation. (To learn more, check out Asset Allocation Strategies and Achieving Optimal Asset Allocation.)

Betty's other option would be to postpone retirement for at least five years. If she were to delay retirement by five years or more, then her current portfolio would be worth approximately $560,000 at the end of 15 years. This difference would almost certainly cover any possible loopholes in her budget and still leave room for final medical and funeral arrangements.

Reality Bites
This example shows the conflict that often exists between a client's dreams and his or her financial reality. In this case, Betty's desire to buy a boat and travel around the Mediterranean is achievable, as long as she is willing to make one or two adjustments. If she is not willing to pursue either solution listed above, then her desires may go unfulfilled. As an alternate example, assume that Betty is in the same situation as before, except that she has no retirement savings whatsoever. If she were to demand that her financial planner allocate her portfolio so that she could live as she wished upon retirement, then her planner may do well to have her take her business elsewhere. (To learn more, see Manage Your Client's Expectations and Managing (Seriously) Dysfunctional Clients.)

It is not your job as a planner to fulfill an impossible dream for an unreasonable client. Trying to do so could land you in arbitration at some point. But educating your client on the current state of their portfolio, and providing your client with the reality of their situation will go a long way. (For related reading see Personalizing Risk Tolerance and Determining Risk And The Risk Pyramid.)

Financial planners are in the business of turning their clients' dreams into financial reality. No two clients will have the same dreams or financial situation, that's why it's important to create a profile for your client and determine their individual risk tolerance. In fact, the ability to help your clients quantify their financial goals will be a crucial factor in determining your success as a financial planner.

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.