Analyzing Potential Consumer Portfolios in 4 Steps

This is a state of affairs I believe you will be aware of: on the finish of a productive assembly, a potential consumer fingers 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 method this activity?

After all, there are a lot of choices out there. However to simplify the method, right here I’ve outlined 4 steps for analyzing potential consumer portfolios. The objective is to get the information you might 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, have a look at the investments contextually, primarily based on the prospect’s present and future objectives, danger tolerance, and time horizon. You’ll be able to collect this data informally (e.g., taking notes throughout your assembly) or with a extra formal method (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 belongings. Some data will likely be detailed on statements, however you may think about using a analysis device, reminiscent of Morningstar® Advisor WorkstationSM, to assemble further knowledge. Beginning at a excessive degree and drilling down, listed here are some subjects and inquiries to evaluate:

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

Asset class publicity. Is there applicable diversification among the many fairness asset lessons? Are the relative weights in keeping with related fashions you might use? Is the fastened revenue publicity weighted appropriately for the present and anticipated future rate of interest atmosphere?

Chubby/underweight sectors and areas. Is there a focus in (or lack of publicity to) a selected business 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 positive aspects that must be addressed?

Step 3: Establish the Key Options of the Investments

To take a deeper dive into funding traits, you will need to use numerous metrics. I’ve highlighted a couple of right here, however tailor your evaluate to these most related to your potential consumer’s state of affairs.

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

Fastened revenue traits. Overview the credit score high quality and efficient period measures. Are they applicable for the present fastened revenue atmosphere?

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

Trendy portfolio idea (MPT) stats. After all, you may 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:

• Commonplace 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 may be attributed to following a benchmark)

Trailing returns. As soon as you’ve got reviewed the portfolio’s different traits, it is time to have a look at trailing returns. It could appear counterintuitive to evaluate these final, however doing so can present worthwhile perspective on the prospect’s state of affairs. It gives you a way of what the anticipated returns must be after which affirm that efficiency is suitable.

Step 4: Discover the Alternatives

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

To strengthen your case, establish any precise deficiencies, potential dangers, or room for enchancment. This may embody, 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 if you happen to discover that the prospect’s present investments are literally good? This may increasingly look like a stumbling block, nevertheless it would not should be! Keep away from formulating a “story to inform” that simply is not there—you definitely do not need 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 creating belief. After delivering the information that the prospect’s investments are in fine condition, you may lead the dialog in a couple of instructions:

Plan for future objectives. It could be that the present allocation has served the prospect properly previously. However now may very well be the time to regulate the investments to assist meet objectives going ahead, particularly if the prospect is nearing retirement.

Take income and de-risk. The prospect’s allocations might have carried out properly recently, partially as a result of run-up in equities we have seen over the previous decade. Take into account locking in a few of this progress and reallocating to de-risk the portfolio, in case the markets pull again and erase the positive aspects.

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

These are only a few methods to articulate the worth you may carry to a portfolio that is at present performing properly. However remember that the investor is assembly with you for a purpose—and it is most probably not associated to investments or efficiency.

It Begins with Service

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

Editor’s Be aware: This publish was initially printed in April 2015, however we have up to date it to carry you extra related and well timed data.