A critical element in crafting an investment policy for a client is understanding the client. This fact is obvious, yet often overlooked. An adviser who leads with solutions, before taking the time to understand the client's situation, is likely not destined for a long and successful career in financial services.
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.
This module also focuses on how the client might be profiled with respect to investment style and risk aversion and how investors behave in the changing marketplace. This understanding of the "inner" client needs to be united with what is known about the client's resources and goals and reflected in a formal investment policy statement to guide future action. We examine both the purpose and the importance of the formal investment policy, including the investment professional's role as well as the client's. A sound investment policy statement includes minimum elements and key attributes. Finally, we consider the challenge that the investment professional faces when managing the relationship with the client during periods of hange-change in the client's personal and financial situation, and change in the economic environment.