The wealth management adviser takes a holistic approach to working with their high net worth clients, and is often serving in a relationship management role and may not be the hands-on investment professional for the client. However, the wealth management adviser must still have a fundamental understanding of the investment process, and this module considers several concepts that constitute the very heart of that process. Investment risk is defined, along with tools to categorize client attitudes toward risk. Systematic and unsystematic risk are also defined. Betas are reviewed in terms of their ability to measure risk, both at the individual security level and at the portfolio level. The capital asset pricing model (CAPM) is introduced as a method of calculating riskadjusted return.

Focusing next at the portfolio level, the concept of diversification is explained. Practical approaches to creating efficient client portfolios are then discussed. Time horizons are an important factor to be determined in the client assessment process. All of these aspects of the process serve to educate the client about the relationship between risk and return. In providing this education, the investment professional adds value to the client relationship. This module also demonstrates the use of indexes to account for the performance of investment professionals. Specifically, portfolio performance is compared using the Jensen, Treynor, and Sharpe indexes; these indexes allow for risk-adjusted comparisons to be made between portfolios.

Author: Cindy Shnaider, MSF

Cindy Shnaider, MSF is an associate professor at the College for Financial Planning. After earning her master’s degree from the College, Cindy began developing and teaching finance and financial planning courses in the College’s graduate degree program, and has continued to do so for over five years. Some of those courses include advanced corporate finance, behavioral finance, and portfolio management. You can contact Cindy at cindy.shnaider@cffp.edu.

Complexity Level: Intermediate