Topic 4: Ascertaining Client Needs

Question 1

Ascertaining client needs…

Answer 1

1. Post sale, you are a consultant
2. Risk questionnaires
3. Fact finds & “soft”stuff
4. Good questioning techniques
5. Taking notes
6. Repeating back to them
7. Client sign-off

Question 2

In risk questionnaires consider:

Answer 2

1. Importance of discussions with client
   2 Tolerance vs. capacity
2. Financial risk vs. other risk
3. How link risk score to a recommended portfolio?
4. Best practice vs. Financial Ombudsman service (“FOS”) demands?

Question 3

Risk Profile is important but not everything.

Other information that is REQUIRED:

Answer 3

1. Structures
2. Existing and likely assets and liabilities (including health issues, dependents etc.)
3. Previous investment experience
4. Insurances
5. Required income

Question 4

PWM as consultant: 3 steps

Answer 4

1. Ascertain client needs, understand circumstances
2. Prepare financial plan or investment proposal
3. Implement proposal, typically by investing funds, ongoing management of funds and regular reporting to clients

Question 5

Risk Tolerance
vs
Risk Capacity

Answer 5

Risk Tolerance: emotional ability to deal with risk and consequences
Risk Capacity: actual ability to engage in risky activities

Question 6

Methods to understand risk tolerance

Answer 6

1. Questionnaires (eg FinaMetrica;
2. Personal Financial Information (Mercers questionnaire…)
3. Ask
4. Team (one takes notes; etc)
   5.

Question 7

Other manifestations of risk (2)

Answer 7

1. Perceived vs Actual (eg perceived risk of excess taxes, vs real failure to maximise after tax returns)
2. Loss of Principal vs Loss of Lifestyle (eg inflation adjusted returns vs principal guarantee)

Question 8

Heuristics

Answer 8

Cognitive rules of thumb that simplify the decision making process (mental shortcuts)

Question 9

Behavioural Finance

- Heuristics & Biases (8)

Answer 9

1. Representativeness (future is similar to the past)
2. Availability (recall based on available info rather than doing further research)
3. Overconfidence
4. Panic (panic reduces brain’s ability to process info clearly)
5. Contageous Enthusiasm (crowd must know something / misery loves company)
6. Confirmation bias (investor sees only info confirming his/her original judgment)
7. Regret, Pride, Shame (investment decisions empowered with social commentary)
8. Anticipatory Regret (If decision has possibility of pain/loss/shame; then investor may do nothing)

Question 10

Mental Math (4)

Answer 10

1. Loss Aversion: Higher psychological value of losses rather than gains
2. Mental Accounting (multiple accounts rather than whole picture)
3. Small vs large samples
4. Relative vs absolute

Question 11

Framing

Answer 11

1. Refocus on long term by producing quarterly reports with annual numbers and longer
2. Loss averse vs risk averse