Las Vegas (Jan. 8, 2004) -- In order to add value for clients in a highly competitive environment, financial advisors have to provide their clients with three main elements, a CPA financial advisor here told attendees at the American Institute of CPAs' Personal Financial Planning Technical conference.
Advisors must provide clients with the education necessary to determine what the winning strategy is for them; they must provide clients with that winning strategy; and they must provide clients with the discipline to stick with that strategy, Larry Swedroe, principal and director of research at Buckingham Asset Management, told CPA planners here.
As part of that process, advisors have to develop an investment policy statement that identifies the clients' ability to take risk, their investment objectives, and their risk tolerance. In addition to identifying clients' ability to take risk, advisors must also factor in clients' willingness to take risk, as well as their need to take risk, Swedroe said.
According to Swedroe, there are four key questions advisors should be asking clients:
What's the correlation between non-investment income and the economic cycle risk of equities?
How close are you to retirement?
What's the percentage of investment capital to the total assets?
What's the stability of your earned income – how easily are the job or income replaced?
"All advisors look at the investment horizon to determine the clients' ability to take risk, but most overlook the stability of earned income," said Swedroe.
Swedroe also recommended that advisors educate clients about financial history by teaching them not to treat the unlikely as the impossible and by making sure clients aren't over-confident of their ability to deal with the emotions caused by severe bear markets.
-- Melissa Klein
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