Reading notes. Determine client s financial needs and risk. A client's needs. Introduction. 'Fact finder'

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1 Reading notes Determine client s financial needs and risk Introduction This learning resource examines how to meet a client s specific financial needs. Specifically, it addresses: the six steps that need to be followed to develop a sound financial plan the 'fact finder' form used to collect essential information the client's risk profile and how to determine it how to identify the types of products best suited to a client's personal and financial situation. A client's needs One of the roles of a financial adviser is to guide clients in their choice of investments. Advisers need to understand the principles of investment and be able to communicate those principles to clients. They need to be able to devise investment strategies that fit the financial circumstances of each client. Devising such strategies will involve taking into account the specific needs and goals of clients and this requires planners to be astute when recommending investment products. Investment strategies will need to be closely tied to each client s risk profile, established through a fact finder form and clients reactions to a variety of issues will need to be assessed. 'Fact finder' In dealing with clients at any phase of their life cycle, financial planners must gather enough reliable information to be able to develop and provide a sound financial plan. A data collection questionnaire (also referred to as a Determine client's financial needs and risk: Reading notes 1

2 fact finder) forms the foundation of a financial plan. Clients are asked to furnish details of their financial resources and obligations in addition to details of employment income, insurance coverage, dependants etc. The questionnaire/fact finder should be completed with the financial planner to ensure the client has understood and furnished copies of relevant documents to complete the financial plan fully. The risk factor The 'golden rule' One should always bear in mind one simple rule when assessing risk: the higher the anticipated return, the higher the associated risk. This is often referred to as the risk/reward trade off. Different types of risk Investors will be willing to tolerate a higher or lower level of risk, depending on a number of factors. One factor is personality. However, personality is modified by other factors, such as age, as young people tend to be comfortable with higher levels of risk than older people. Other factors include the investor s income, net worth and financial experience. Investors who prefer low-risk investments may favour such products as government bonds, which have a fixed rate of interest. However, even investors with a higher risk tolerance are likely to have some fixed interest investments as part of a balanced investment portfolio. Investors also generally like to have some funds that are readily accessible, for unforseen needs. These are likely to be kept in separate accounts to other investments. Most investors will want to own their own home, provided they have the means to do so. Property offers relatively secure gains at relatively low risk and is especially attractive to people who favour moderate levels of risk. Investors with a somewhat higher level of risk will be willing to enter the share market. However, shares range from low to high risk. Investors with a higher tolerance for risk will be attracted to shares that have a high risk and correspondingly high prospective returns. 2 Determine client's financial needs and risk: Reading notes

3 Inflation Inflation may affect clients differently. For example, if clients are paying a high marginal tax rate on their investments, then a high level of inflation may combine with this to wipe out any net gain from an investment. Planners need to identify the time investors are prepared to wait for a return. Clients personal circumstances may also affect the length of time they wish to invest for an investor approaching retirement is likely to prefer investments with a return in the short or medium terms. It is also important to ascertain how sensitive clients are to making a loss on an investment. Loss of capital or income will have consequences ranging from unpleasant to dire, depending on how badly the investor needs that capital or income. Diversification Diversification of investment portfolio is another issue that needs to be discussed with clients. Diversification tends to provide greater security of returns. However, a more aggressively targeted portfolio may provide greater returns, but at a greater risk. You need to make sure your clients fully understand the main issues and investment choices. This is partly on ethical grounds: clients need to understand the choices and risks involved in investment. It is also good professional practice, as clients will be better prepared to accept any losses or low returns if they have been fully prepared at the time they authorise you to follow a strategy of investment. Customisation Financial plans are customised for individual clients. No two financial plans should be exactly the same. This means financial planners need to consider each client s responsibilities, values, needs, wants and resources. There are, however, broad categories that individuals fall into. For example, clients who are young and married are likely to share many financial concerns so their borrowing needs may be quite similar. On the other hand, clients who are retired are likely to share quite a different set of financial concerns. Determine client's financial needs and risk: Reading notes 3

4 The six steps in financial planning There are six basic steps that financial planners need to follow to develop a financial plan. 1 Gather information on the client. Seek quantitative information, for example, the dollar amounts of their investments. Also seek qualitative information, for example, information on the client s values and attitudes. 2 Work with the client to identify their financial goals. 3 Identify financial issues. See where the client has financial problems and devise methods to deal with those problems. Formulate the costs and benefits of various courses of action. 4 Put recommendations in writing. Obtain the client s approval to implement the plan, having made any appropriate modifications. 5 Implement the plan that the client has agreed on. 6 Periodically review and modify the plan. In carrying out steps two and three, financial planners use a fact finder form. As well as gathering basic client information, the fact finder form is used to assess a client s attitude to various financial risks. For example, do they prefer to invest in high-risk stocks, a diversified portfolio of moderate risk investments or a mixture of investments in low risk industries, stocks and bonds? It is a statutory requirement that financial planners use a fact-finder form to get to know their clients. Although the actual questions on the form vary from adviser to adviser, they attempt to establish the client s requirements for access to ready cash, how concerned they are about the impact of inflation on resources, how much money they would be prepared to lose on investments and so on. The form helps financial planners to place an investor on a range from the very conservative (with a low tolerance for risk and financial loss) to the aggressive (with a high tolerance for risk and loss). If your chosen text is Dickerson and Seeley, Managing in an Organisation, now go to Section 3, Chapter 4, "The Financial Services Plan". If your chosen text is English, Hicks et al, Personal Finance Management now read Part A, Chapter 1, "Financial Planning". If your chosen text is Beal and McKeown, Personal Finance, now read the sections on data collecting and information gathering and the six-step financial planning process in Chapter 3, "Financial Planning Skills". 4 Determine client's financial needs and risk: Reading notes

5 Activity 1 Imagine the following scenario: You are a financial planner and a client has come to you for advice. Give examples of four factors that you would need to consider about this individual to assist in developing their financial plan. Check your answer. Determine client's financial needs and risk: Reading notes 5