Much has been written about how to select mutual funds for clients. Countless consumer business magazines have published articles on fund selection, and the topic inevitably appears in the many books written on mutual funds. Most of these discussions focus on the specifics of particular funds-that is, past performance, the track record of their portfolio managers, fees, and so on. Certainly these factors are important and bear scrutiny. Just as critical in selecting a mutual fund for a client, however, is understanding the client. This fact should be obvious, yet is often overlooked.
This module begins with detailed coverage of how to understand a client and the numerous circumstances that need to be considered before recommending a fund. The first topic is data gathering-both quantitative and qualitative.
Quantitative data is drawn from two formal client documents: the statement of financial position and the cash flow statement. These documents are similar to the balance sheets and income statements used by corporations. Anticipated financial changes in the client's situation need to be considered in producing yet another document-the pro forma cash flow statement.
Qualitative data is also important, though not quite as easy to pinpoint. For example, the client's risk tolerance level is an important piece of qualitative data, and it is difficult to determine with accuracy. It is not unusual for clients to describe themselves as "conservative" investors. But what exactly is a conservative investor? Often, self-described conservative investors own speculative stocks, options, and other high-risk financial instruments.
The second major section of this module covers fund selection. This section presents and discusses various factors that should be considered in selecting a specific mutual fund. Mutual fund selection is more of an art than a science, so these factors need to be weighed and prioritized in accordance with the client's objectives and needs.
Jason G. Hovde is the investments professor at the College for Financial Planning. Prior to joining the College, Jason had a financial planning/investment advisory practice and was a branch manager for one of the largest independent broker/dealers in the country. Additionally, he spent several years with another independent broker/dealer, first as a trader and options principal, and then as a member of the senior management team. Jason holds two bachelor’s degrees, one in accounting and the other in behavioral science from Metropolitan State University of Denver, as well as an MBA in finance and accounting from Regis University. You can contact Jason at firstname.lastname@example.org.