How to help clients determine their investment objectives

This helps you, the financial adviser, to determine the appropriate risk budget and strategy with which to invest your client's assets. What do they want to achieve when they reach the finish line - whether it be retirement, post-retirement or 15 years in the future?

Examples of investment objectives include:

• Safety or capital preservation: This client is typically looking for a low-risk investment that will preserve the money they have already saved. However, the investment must still outpace inflation in order to achieve true preservation.
• Growth: This client is looking for capital gains and is prepared to take on some long-term risk to achieve the best growth possible.
• Income: The objective here may be a secondary source of income, possibly to supplement income in retirement. The client does not want to lose capital but they also don’t want to take on high-risk products.
• Diversification: This client is looking to invest across different asset classes or different shares in order to achieve a diversified investment portfolio and reduce their risk exposure.

It's not just about the math

While there is definitely an aspect of forward-planning and ensuring that savings will last in retirement, helping a client determine their investment objectives is not just about the math. First you need comprehension of where the client is – both in terms of their life stage and their financial goals.

To quote Anton Swanepoel's research paper of 2016:

"To understand the client's current financial position … implies that both quantitative and qualitative information is required. From a quantitative point of view it means that an adviser should determine as a bare minimum:

• How much money the client has to invest.
• How much debt the client has.
• How much money the client has in the form of an emergency fund.
• How much money the client would require from an income point of view.

Qualitative information refers to personal circumstances, such as family history, marital status, number of dependents, retirement plans etc."

This will require you and the client to take several different factors into account:

• Do they have a budget in place that allows them to commit to regular saving?
• What is their end goal?
• What is the timeline of the investment going to be?
• What is their risk tolerance?
• What was their experience around money when they were growing up?

You have to be able to translate a client’s financial goals or needs into requirements. Factors that you have to take into account when doing this will include:

• Goals and aspirations
• Financial personality
• Financial circumstances
• Investment preference

Engage with the client

You need to remind the client that while factors such as inflation, interest rates and political events are out of his control, there are other important factors that lie within his control, such as:

• how much he chooses to save,
• where he chooses to save; and
• the timeline of his investment.

Remember that every client and investor has objectives, even though they may not be able to clearly articulate these at first. A financial adviser's task is to engage with the client and help them figure out their investment objectives. This is important because when objectives are not clearly and consciously articulated, investors may land up making a decision which gives a suboptimal return. Your client’s investment objectives help you to gain a clear understanding of what the portfolio is intended to accomplish.

Sources: smarterwithmoney.in; thebalance.com; Assessing Suitability with regard to Investment Advice in South Africa by Anton Swanepoel; A Study of the Factors Affecting the Choice of Investment Portfolio - - http://afr.sciedupress.com. Accounting and Finance Research. Vol. 6, No. 3; 2017 

Disclaimer

This article is meant only as information and should not be taken as financial advice. For tailored financial advice, please contact your financial adviser. Discovery Life Investment Services Pty (Ltd): Registration number 2007/005969/07, branded as Discovery Invest, is an authorised financial services provider.