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Financial planning case study: Understand your client

It is important to find out why a client has strong views on portfolio composition

The problem. The client has a £375,000 pension portfolio and £90,000 Isa portfolio. He has some very strong views on the different investment sectors. Namely, he is keen to avoid entirely any exposure to US equities, Japanese equities and UK gilts. With over 20 years to go until retirement, he has time on this side.

His reluctance to invest in certain asset classes will naturally have an impact on the overall risk profile of the portfolio we recommend. Should his views on investment asset classes determine the advice or should the most suitable portfolio to meet his objectives be constructed?

Issues to look out for:

  • The liability for advice
  • The impact of excluding specific asset classes on long-term investment and how this matches a clients objectives and attitude to risk.
  • Client understanding the interaction between short-term volatility and long-term investment returns.

The solution
It is always a little strange when clients seek and pay for professional advice and then want to play a big role in shaping the recommendations. I have no doubt this client has some valid opinions but it is important that you establish your roles in the relationship correctly at an early stage.

When we have seen previous clients wanting to shape their own recommendations, they have tended to become more opinionated as time goes on, with selective memories about who was responsible for different elements of the advice.

If any of the client’s suggestions are eventually incorporated, it will be important to document this and ensure he takes full responsibility for the outcomes.

In practice, we will remain responsible for the advice we give. This means if you decide to exclude certain investment assets, your recommendation still needs to be in line with his attitude towards investment risk, capacity for loss and experience of investing.

You should start by ensuring the client has fully understood the investment advice process. They should understand this was created based on our long experience providing recommendations and has been extensively tested in a variety of market conditions. This process has been developed to ensure the advice we give is suitable in all circumstances. Any deviation from the process will need to be properly considered and well documented.

It is also important to understand why this client has such strong feelings about these asset classes. Are his views driven by bad experience or have they been shaped by something he has read about in the press?

By understanding his objections, it could become possible to overcome them once they are explained in the context of our overall advice process.

By describing our current house view for each asset class, you can show him how we incorporate underweight positions in some sectors when we consider there to be poor market value. This should be explained in the context of the importance of strategic asset allocation decisions.

With 20 or more years to go, this client should be less concerned with shortterm performance and focus instead on how the portfolios will behave in the long term.
Has this client understood the typical correlation between different investment asset classes?

The exclusion of all exposure to US and Japanese equities and UK gilts will have a big impact on this and result in bigger risks within his portfolios.
Also, is he fixated on absolute returns rather than a strong return relative to his objectives?

Rather than simply accepting his views, this is a good opportunity to have a more detailed discussion.

Our investment recommendations might incorporate some of these views but this should only happen once a process has been followed and the various discussion points have been fully documented.

Shelley McCarthy is senior paraplanner at Informed Choice


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