Client Profiling, A Dynamic Process

The managed money process involves assessing a client’s risk capabilities and determining the investment asset mix. As consultants, we are responsible for both, but our involvement is limited to the latter. Although you, the consultant, conduct the risk profile analysis, the client is the one who ultimately determines their risk profile.

Client Profiling Necessitates Change

Just as the managed money process is a dynamic method whereby a client buys into a disciplined approach to making investment decisions, the ongoing aspect of changes in the market and the ongoing changes in the client’s life make the client profiling process dynamic. Your clients continuously go through periods of change. There are times when their outlook will become more positive. For instance, a new job with a higher salary will likely cause a client’s risk profile to increase.

Conversely, losing a job will immediately reduce a client’s risk profile. Changes will always occur around birth, death, marriage, divorce, or job change, but there are other events outside a client’s life that will impact a client’s risk profile. Extended, multi-quarter market corrections or extended market rallies will also affect a client’s ability to assume risk.

As consultants, we are responsible for maintaining “discipline” in our disciplined approach and not randomly changing asset mixes to accommodate the wishes or needs of a client’s changing attitudes about the markets. It is for this reason that the discipline exists in the first place. When going through a period of upheaval, clients want to change their risk profile not from a Category 4 down to a Category 2, but instead, they want to go to all cash or a Category 0, which is not a prudent investment choice. An all-cash portfolio is a guaranteed loss of buying power. (The only exception to this rule is when the client’s time horizon is so short that the necessity for liquidity is greater than buying power.) As the consultant, you need to educate the client and encourage them into something other than a Category 0 risk profile.

Client Profiling Schedule

As a rule of thumb, clients should be re-profiled every 18 to 24 months or whenever something happens in their life that has a strong positive or negative effect. As we mentioned earlier, marriage or divorce, birth or death, a new job or loss of employment, or even a multi-quarter or multi-year rise or decline in the markets should initiate a re-profiling process. Clients who have been re-profiled regularly and have allowed their profile to adjust with concerns or changes in their life do not go through the broad emotional swings regarding the markets that other clients often do. A client who has moved from Category 4 down to a Category 2 will ride through a pullback in the market more comfortably than one who has not. In addition, as the client’s comfort level increases, they can still move back into an allocation with a higher risk. This dynamic aspect of the market allows the client to satisfy the need “to do something” while at the same time educating the client on the importance of discipline. The client controls the risk as you control the asset mix.

Note that it is dangerous to adjust asset mixes randomly. Help the client understand that discipline works in all markets, up and down. It is their comfort level that changes and which can be re-adjusted when the markets turn around.

The most effective way to educate your clients is through teleclasses. In times of significant market change, getting information out to your clients is essential. Tell your clients that it is crucial to reexamine their risk profile because of what has happened in the markets, and you will be sending out a Rebalancing Kit that allows them to do this. The cover letter on this kit states: “Mr. Jones, your current risk profile is X and allocated this way. If you feel, because of changes in your life or changes in the market, that your risk profile has changed or you would like to re-test yourself, please answer and score the questions attached.” The kit would then include the risk profile questions approved by your firm and a method for self-scoring and ranking among the risk profiles you have established. A client can now see that where they were once a Category 4, they have now backed down to a Category 3 and that this reduction builds a more conservative portfolio that puts them more at ease. The form allows them to sign the document and say, “I want to maintain my current allocation.” Or “I want to change my current allocation to X.”

I encourage you to remind your clients of their involvement in the process and that the disciplined approach to making investment decisions does work and has substantial value. Doing so will allow your clients to understand further the managed money process and its viability in up and down markets while reconfirming your role as the general contractor in their financial life.


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