June 20, 2020

Managing the client rather than their assets

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Financial history is peppered with stock market crashes, property market booms and busts and a vast array of stories of individuals who have either made or lost fortunes, or even both. Irrespective of the past, a financial adviser deals with the here and now as well as the future, keeping one eye on clients’ possible expenditure requirements. In doing this, giving the right advice is a subjective process in terms of possible investment portfolio construction and asset mix or promoting beneficial financial habits. Irrespective of the type of client or their individual requirements, the adviser’s methodology in giving financial advice needs to be robust, easily understood and capable of consistent application. Managing the client rather than their assets is what needs to be done.

In the investment arena, many clients find stock markets and matters such as asset allocation and volatility complex or even scary. A common experience of most investment advisers is that even when the client confirms verbally that they understood an investment concept that has just been explained to them, true understanding usually requires the explanation to be repeated several times before the issue is grasped.

Risk profiling is possibly the single most important regulatory issue facing investment advisers and financial institutions at this time, as the consequences of getting it wrong or even not doing it can be severe for both investor and adviser. Getting it right confers major benefits, for example, by allowing diversification to dilute risk or identifying when to stretch investors to go beyond their usual comfort zone and take slightly more risk needed to meet goals.

In recent years, especially in the UK, there has been a steady growth in advisers’ use of investor risk profiling tools provided by investment companies. These alone, however, are not silver bullets for defining risk, despite the encouragement by such companies who have a vested interest in providing the shortest possible route to a client selecting their investment funds. All of this assumes, of course, that these profiling systems have been constructed correctly and are properly validated.

The traditional understanding of risk is, however, only half the picture. By solely focusing on investment return, investors and their advisers ignore the reason for investment return, namely the satisfying of a need for capital growth. Such a need is based around a future requirement for expenses to be met, especially those that are based in the reality of current needs. This also means that a client’s current financial behaviour needs to be addressed. Such behaviours include blind purchasing by clients of financial products other than investments as well as overreaching in borrowings. Similarly, spendthrift behaviour merely because cashflow is available is not a sustainable long term financial behaviour. Nevertheless, not only can clients lose the run of themselves but advisers who fail to advise these clients otherwise could lead to such behaviour being interpreted as acceptable and in some way a part of their future financial planning approach. The acknowledgement of risks other than the traditional views of investment risk is key to good financial planning. Even more important is the education of clients in such regard. What financial planners need to recognise is that they are primarily investor managers as opposed to investment managers and client leaders rather than product sellers.

While “knowing the client” is a prerequisite by any financial regulatory code, too few advisers take the trouble to know the client from the inside out since to do so takes time and may create additional workload. Rather than looking at such “work” as a negative, it should be viewed as a key building block in not only providing the right understanding of the clients’ needs, financial and emotional, but also in establishing long term successful business relationships for the adviser. This can only help to ensure that a long term business relationship will develop and thrive beyond any short term product sale.

This article is an extract from a White Paper on financial risk entitled: “Dealing with Financial Planning Risk – Directing Porfolio Decisions or Navigating Behavior?” – which can be accessed at

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