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Chapter 4 - Getting to Know the Client
SUMMARY The job of an investment advisor is to judge investment suitability based on their knowledge of the client’s goals, personal circumstances, financial circumstances, time horizon, investment knowledge and risk tolerance. Financial objectives are set by clients, sometimes with the help of financial counsellors. Objectives are best stated in terms of precise financial targets, but they need not be in order for the investment advisor to be of assistance. The most important aspect of a financial objective is its investment horizon. Objectives can also be stated in terms of the type of return desired, such as safety of capital, current income or growth (capital gains). Financial circumstances provide an indication as to whether the client is able to attain stated goals with the financial resources available while maintaining sufficient cash reserves. Understanding clients’ net worth provides an indication of their investment knowledge and current asset allocation. Personal circumstances indicate the extent to which investors might need access to savings in order to meet family responsibilities, and the extent to which they can afford to take investment risks. Clients with a high level of investment knowledge know the mutual funds they wish to buy, their risk/return characteristics and their desired asset allocation. In addition, knowledgeable investors are also likely to have a good idea of their own level of risk tolerance. Risk tolerance has both a psychological component and a circumstance-related component. People tend to become less risk-tolerant as they age. People with family responsibilities are, because of circumstances, less inclined to take investment risk. Since investors’ personal circumstances, objectives, time horizon, financial circumstances, investment knowledge and risk tolerance change over time, it is important for the investment advisor to follow the client. Normally, clients should be requested to have their investment portfolios re-evaluated annually or sooner if circumstances change. A difficult client is one who is unwilling to provide the necessary information so that the investment advisor can judge investment suitability. In the case where sufficient information cannot be obtained, the advisor should refuse to take that client’s order.