This also takes the responsibility out of the realm of how good your man- ager selection was and puts it back squarely on the client’s shoulders. You just show the client the facts.
Once the client understands that he/she will have a money shortfall, you can look at optimal asset allocation and recommend a strategy. (Do you see why we are including financial planning in the next chapter?)
You should have a series of market charts that you can show at this point to help your client see what the market has done over different time periods.
Show him/her how, by adjusting the asset allocation percentages, he/she can meet his/her future financial goals and stay within his/her risk tolerances.
Include your client in this step of the process. Together you may discover that optimizing his/her asset allocation is still not enough to bring the probabili- ties of success to acceptable levels. Now what?
Work with your client to adjust more of the knownvariables (e.g., savings rate, expenditures rate, and/or time allocated to achieve his/her goal). The client may need to extend his/her retirement date by 5 or even 10 years to make things come into line. This makes him/her think. He/she may also bring in more assets. At this step you are building trust.
This is the most important step of the process because it establishes realis- tic expectations and begins the educational process. Including this step will impact the probability of your client reaching his/her target financial goals.
Explain that the ultimate decision between the downside volatility versus the promise of a higher probability of success is based on the fine-tuning of all known variables, such as time horizon, savings, and expenditures. Keep put- ting responsibility back in the client’s court. Help your client fine-tune these variables, and he/she will see where you are going.
Once your client understands and accepts the risks, it’s time to create a detailed asset allocation within the major asset classes. This becomes the long-term strategic investment plan with the highest statistical degree of probability of reaching your client’s goals.
your client’s assets in concert with one another, thus creating an efficient strategy on both an investment and tax basis.
Only after this aspect of the client’s plan is complete should you initiate an investment vehicle search.This search is conducted for each style in each allo- cated pool of assets. When all of the information is known, then the universe of possible investment products—including mutual funds, index-type invest- ments, and separate accounts—can be examined objectively. Explain what is to be expected and what is not.
Realistic Expectations
■ Investment style and discipline are clearly defined.
■ Separate account manager adheres to that style and discipline under all market conditions.
■ The manager outperforms the benchmark over the long term.
■ The separate account manager agrees to communicate in a timely and ongoing fashion.
Unrealistic Expectations
■ The manager will make a profit on every investment. (Some selections will decline in value or may be sold at a loss.)
■ The manager will perform in line with or better than the market in every period.
■ The manager will be in the top quartile of managers in every period.
■ The manager will change style to perform at the top of each market.
Long before the clients see these managers, the smart advisor puts recom- mended investment vehicles through an intensive qualitative and quantita- tive screening process. The process makes sure that the separate account or mutual fund consistently adheres to stated discipline and style, providing quality results with minimal surprises. In addition, with taxable accounts, investment vehicles are screened to find those that create the fewest taxable events. An ongoing step is rebalancing,or bringing the percentage of assets back to meet the client’s target dollar goals.
As you follow the process, your client will see how value is continually added each step of the way. On a quarterly basis, your client will receive a report depicting his/her progress. If done correctly, these reports should keep him/her concentrating on long-term goals rather than on short-term capital market swings. If capital market movements cause the strategy to drop below 66 THE PROCESS
the agreed-upon probability of attaining the goal, the report will recommend changes in strategy to get it back on track.
This process can set you apart from the competition. Overlay your original investment policy with your client’s current situation. Show him/her statisti- cal models that back up your method using proven investment principles. If you do this, you will rise head and shoulders above your competitors. Follow this process, and you also can achieve the highest probability of future busi- ness success. You will become a very valuable member of your client’s team and get him/her to stop concentrating on past performance and look at the resources needed to reach his/her goals and financial expectations. Your client will feel like he/she is part of the process, not an outsider ready to switch advisors the second something goes wrong.
The 10-Step Separate Account Process 1. Information gathering
2. Financial planning
3. Fine-tuning of known variables such as time, savings, and expenditures 4. Asset allocation
5. Style allocation and tax considerations
6. Written statement of investment objectives (client goals) 7. Selection of appropriate investment vehicles (manager search) 8. Measurement of progress (monitoring)
9. Rebalancing
10. Ongoing communications
Next, let’s break down each step starting with information gathering and financial planning.
The Investment Management Consulting Process 67
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