5 Vital Questions Financial Advisors Should Ask New Clients

The financial advisor-client relationship is a delicate one. Dealing with a client’s financial future is a heavy responsibility for the advisor but how can you meet the needs of a client? A lot of that involves asking the right questions.

Much information doesn’t come out through back and forth discussion and needs to be extracted through specific questions and elaborate answers. Below are 5 questions you should ask your clients that will help you to gain a better understanding of their financial profile and create a platform for a transparent relationship. By starting out on the right foot, future misunderstandings can also be minimized.

These questions fall into three broad categories; relationship, risk, and wealth accumulation.

Relationship Questions

  1. What are your biggest money worries, and how do you hope I can solve them with you?

This may be the most important question to explore with a client. As an advisor, you are a problem solver, and you need to understand what is expected of you, from the beginning. It’s also a great way to build rapport and show the client that you are on his or her side and want to improve their life.

  1. Since investment returns go up and down, regardless of how talented the advisor, how much would your investments need to decline before you fired me?

This question has two purposes. First, it sets the stage for the investing reality that financial assets go up and down, regardless of the talent of the advisor. It also provides a starting point to educate the client about the particulars of investing in the markets. Second, the response to this question can be filed away for the future, so that if a client panics after a five-percent market drop, you can revisit the responses to this initial question, while calming frazzled nerves.

Risk Questions

  1. What percent loss in your overall investment portfolio would cause you great personal discomfort such as lack of sleep, worry and despair?

Financial professionals generally measure risk by standard deviation or volatility. Both the investor and financial professional need to understand how much risk an investor can ‘stomach’ before he or she is tempted to do something stupid, such as sell at the bottom or dump all of his or stock mutual funds.

  1. Under which scenario would you feel worse; if your mutual fund fell 10% and you didn’t sell it, or if you sold your fund and it increased in value 10% after you sold it?

Behavioral finance theory generally alleges that investors feel worse about losses than they do about comparable gains. By assessing how one feels watching his or her investments fall in value, versus selling and then watching the investment gain gives insight into an investors risk tolerance. To get some real life data, you might want to follow up and ask if this situation has ever occurred.

Understanding a client’s risk tolerance can also help the advisor and client determine the overall portfolio asset allocation. The more risk averse investor will lean towards a greater allocation in bonds and fixed asset classes and a lesser percent in more volatile stocks and stock mutual funds.

Accumulation Question

  1. How will you measure the success of your financial investment portfolio?

In investing, there is usually an investment benchmark return for the client’s portfolio. For example, if the client has a 60% stock and 40% bond asset allocation, then the investment portfolio returns would likely be measured against the proportionate returns of the S&P 500 and that of a Barclay’s bond index.

If the client respond’s to this question by saying he or she expects a 10% annual return every year, then the advisor must educate the individual about historical market returns, to avoid misunderstandings down the road.

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