Analyzing Potential Consumer Portfolios in 4 Steps

Here is a situation I believe you may be acquainted with: on the finish of a productive assembly, a potential consumer palms you a pile of her present funding statements. You have not but secured her enterprise, so analyzing these paperwork will likely be essential in convincing the prospect to depart her present advisor. However what’s one of the best ways to strategy this process?

In fact, there are numerous choices obtainable. However to simplify the method, right here I’ve outlined 4 steps for analyzing potential consumer portfolios. The purpose is to get the info you’ll want to proceed your dialogue—and switch that prospect right into a consumer.

Step 1: Assess the Prospect

The primary—and presumably most necessary—step is to evaluate the prospect. Merely reviewing his or her investments in a vacuum limits the quantity of worth you may provide. As a substitute, take a look at the investments contextually, primarily based on the prospect’s present and future targets, danger tolerance, and time horizon. You’ll be able to collect this info informally (e.g., taking notes throughout your assembly) or with a extra formal strategy (e.g., utilizing a consumer consumption type).

Step 2: Consider Present Belongings

With the prospect’s wants as your body of reference, consider his or her present property. Some info will likely be detailed on statements, however you may think about using a analysis device, corresponding to Morningstar® Advisor WorkstationSM, to collect further knowledge. Beginning at a excessive degree and drilling down, listed below are some subjects and inquiries to evaluation:

Total asset allocation. What are the overall fairness and stuck revenue quantities and percentages? Are there various investments? Is that this mixture of equities, fastened revenue, and options acceptable for the potential consumer’s targets and danger tolerance?

Asset class publicity. Is there acceptable diversification among the many fairness asset lessons? Are the relative weights according to comparable fashions you might use? Is the fastened revenue publicity weighted appropriately for the present and anticipated future rate of interest setting?

Chubby/underweight sectors and areas. Is there a focus in (or lack of publicity to) a selected trade or international territory? How does this have an effect on the portfolio’s danger profile?

Safety kind and tax. Is the prospect invested in mutual funds, exchange-traded funds, and shares? Are there closed-end funds, unit funding trusts, or particular person bonds with which you are not acquainted or skilled? Does the assertion point out any giant taxable features that must be addressed?

Step 3: Establish the Key Options of the Investments

To take a deeper dive into funding traits, you may wish to use varied metrics. I’ve highlighted a number of right here, however tailor your evaluation to these most related to your potential consumer’s scenario.

Yield. How a lot revenue are the investments producing, and the place is it coming from (fairness dividends, fastened revenue curiosity, and many others.)? Is that this revenue degree assembly the prospect’s present wants? Will it’s sufficient as his or her wants evolve?

Mounted revenue traits. Evaluation the credit score high quality and efficient length measures. Are they acceptable for the present fastened revenue setting?

Fund evaluation. Are the fund bills cheap? Do you could have entry to lower-cost variations of the identical funds? How have the funds carried out relative to their friends?

Fashionable portfolio principle (MPT) stats. In fact, you will get as deep into the weeds with MPT as you want. However I’ve narrowed it down to some metrics that I consider are price reviewing:

• Normal deviation (the portfolio’s danger or volatility)

• Beta (the diploma to which the portfolio strikes in relation to a benchmark)

• Alpha (measure of a supervisor’s efficiency past what might be attributed to following a benchmark)

Trailing returns. As soon as you have reviewed the portfolio’s different traits, it is time to take a look at trailing returns. It could appear counterintuitive to evaluation these final, however doing so can present invaluable perspective on the prospect’s scenario. It offers you a way of what the anticipated returns must be after which affirm that efficiency is acceptable.

Step 4: Discover the Alternatives

An efficient method of discovering alternatives is to tie collectively the consumer evaluation and portfolio evaluation. Search for any apparent disconnect between the potential consumer’s targets (and danger tolerance) and the asset traits. Merely put:

To strengthen your case, determine any precise deficiencies, potential dangers, or room for enchancment. This may embrace, for instance, the fairness/fastened revenue combine, a selected asset class (or safety) that’s over- or underweight, inadequate revenue, extra danger, or excessive fund bills.

However what in case you discover that the prospect’s present investments are literally good? This will look like a stumbling block, however it would not need to be! Keep away from formulating a “story to inform” that simply is not there—you definitely do not wish to make competing on efficiency your solely value-add. As a substitute, be up entrance and sincere with the potential consumer from the beginning, which can go a good distance towards growing belief. After delivering the information that the prospect’s investments are in fine condition, you may lead the dialog in a number of instructions:

Plan for future targets. It could be that the present allocation has served the prospect nicely up to now. However now might be the time to regulate the investments to assist meet targets going ahead, particularly if the prospect is nearing retirement.

Take income and de-risk. The prospect’s allocations could have carried out nicely recently, partly because of the run-up in equities we have seen over the previous decade. Think about locking in a few of this progress and reallocating to de-risk the portfolio, in case the markets pull again and erase the features.

Evaluation inside fund bills. If inside fund bills are excessive, you might be able to provide lower-cost institutional shares of the identical (or comparable) funds. This fashion, the prospect’s value of possession will likely be diminished.

These are just some methods to articulate the worth you may deliver to a portfolio that is at present performing nicely. However do not forget that the investor is assembly with you for a purpose—and it is most certainly not associated to investments or efficiency.

It Begins with Service

The analysis tells us that many consumers determine to change advisors primarily based on service (or lack thereof). Particular causes usually cited embrace advisors not returning telephone calls and e-mails in a well timed method and never being proactive in making contact. As such, personalised service and offering choices that prospects aren’t at present receiving—corresponding to complete monetary planning—might be precisely what earns you their enterprise. By performing a strategic evaluation utilizing the steps described above, you may show your worth to the potential consumer, regardless of the state of his or her present funding portfolio.

Editor’s Word: This publish was initially printed in April 2015, however we have up to date it to deliver you extra related and well timed info.