The importance of client profiling
December 2008
You would not expect a doctor to diagnose your
condition and prescribe treatment without a thorough examination,
discussion and consideration of your medical history and existing
medication. Similarly, before recommending any financial
solutions, it is essential that a client’s circumstances,
requirements and objectives be fully understood. The key
tool, used by Fairbairn Private Bank, to help collate this
information is a ‘financial profiler’.
The financial profiler is a detailed
questionnaire which covers factual information such as income,
expenditure, assets and liabilities, as well as assisting with the
capture of softer facts such as the client’s goals. Whether they
plan to retire early, provide funds for school fees or purchase a
holiday home, the most important issue is their attitude to and
understanding of risk. The profiler helps to determine the
client’s needs and objectives so that the most suitable ‘treatment’
can be recommended.
The exercise of completing the financial
profiler can prompt a client to think more carefully about their
current situation and assists in identifying, discussing,
quantifying and prioritising the client’s needs. To help
establish the priorities, needs should be tackled in order of their
relative importance.
Firstly it is essential to ensure that
consideration is given to protection. Making sure the
client’s liabilities and their family’s standard of living is
protected in the event of their death, critical illness or
long-term incapacity. It is also important to ensure that
their will and estate planning requirements are considered. As part
of the profiling process, the client is advised to consider all of
these issues and, where applicable, the client will be referred to
a third party legal professional.
Once consideration has been given to
protecting the client’s capital and income liabilities, retirement
planning requirements should be examined. Any shortfalls in
retirement income could then be quantified and the relative
importance of this area discussed. Saving on a regular basis
and making lump sum investments would then be addressed.
Having identified, discussed and quantified a
client’s needs, their priorities should be agreed. It may be
that the client has a specific need but they do not want to address
it at this time. If this is the case then it is the adviser’s
responsibility to ensure the client is aware of the relative
importance of the requirement and the implications of not
addressing that particular area.
With regard to investments, for example, it is
crucial that the client’s objectives are correctly captured, such
as timescales, currency preference, whether the investment is for
income or growth, and the client’s attitude to and understanding of
investment risk.
So how is a client’s personal risk preference
determined? The answer to this is dependent on determining
the client’s financial goals, and these can vary from securing a
source of income, to building a substantial lump sum over the long
term to finance specified objectives, such as retirement.
Certainly, the key is to explain and define attitude to risk, and
as much detail as possible should be noted on the profiler.
This then provides the mandate on which the recommendations will be
based.
Financial planning, as with any other
planning, is not a one-off, single process and for the client to
obtain maximum benefit an adviser should regularly review the
client’s position or, to continue the medical analogy, perform a
‘health check’ and record any changes in their ‘profile’ or
circumstances. The information captured on the profiler goes
beyond the details recorded on an account application form and is
held on file for future reference for the benefit of both the
client and adviser.
Obviously, a significant life change such as a
marriage, birth of a child or house move creates different
financial requirements. Changes such as these can alter a
client’s attitude to risk, which in turn, may require a change to
any investment strategy.
Client profiling should not be solely an
exercise in form filling and, in essence, should reflect a detailed
examination of all aspects of a client’s circumstances, aspirations
and goals. It provides a structure to the discussions and
ensures that the adviser has a permanent record of the client’s
financial position at the point in time when the advice is
given. It not only satisfies the requirement of knowing your
customer but also provides an in depth tool to assist both the
client and the adviser achieve a consensus on how their business
relationship will develop. It highlights important areas of
financial planning which could have dramatic consequences for the
client. Imagine the individual who approaches retirement but
has not saved or invested sufficient capital to comfortably
maintain his family’s standard of living. Careful financial
planning, which starts with client profiling, could prescribe the
remedy.