Bowen, founder and CEO of CEG Worldwide, previously worked as a financial advisor and firm executive. He served successively as CEO of Reinhardt Werba Bowen Advisory Services and Assante Capital Management.

Getting Formal

One of my most important messages bears repeating in today's tough marketplace: If you want to be a successful advisor, you've must take a consultative approach with your clients at every stage—including the investment planning process. A consultative approach uses a defined process to ask each client detailed questions that allow you to formulate a formal, comprehensive investment plan built around custom solutions. This is a big part of what true wealth management is all about.

This approach stands in stark contrast to the traditional method of asking a few questions focusing on a specific set of issues, such as investments, and then making a recommendation for a specific product that addresses a specific question. You can no longer operate effectively using that highly simplistic model—especially not in the current market downturn, when research shows that four out of five affluent clients are thinking of switching to new financial services professionals.

A formal investment plan is one reason why top advisors are more successful than their peers. Consider that 81.9% of wealth managers who earn an average net income of $881,000 provide their clients with formal plans. By contrast, just 37% of investment generalists do so. Their average net income is $279,000—more than $600,000 less.

The upshot: The financial services industry you have known in the past is not the industry of the future. You've got to rise to the occasion—and consultative client management is a big part of doing so.

Preserving Wealth

I've reviewed aspects of consultative client management—such as discovery meetings—in previous columns (see "The Path to Discovery," February 2009). Another key component is the investment planning meeting, at which you give clients or prospects a detailed investment plan that describes their needs and risk tolerance and provides benchmarks for tracking progress toward their goals. This plan is an important step in establishing you as an expert in the eyes of prospects and clients. And it will be the road map that will maximize their ability to achieve everything that is important in their financial lives.

You should prepare a formal investment plan for each of your clients—no exceptions. It is that important. However, understand that you need to create an investment plan, not a financial plan. While many advisors recognize the power of astute financial planning, most have found it difficult to execute it well or profitably. By positioning themselves as financial planners, they send a message to prospects that they are experts in all aspects of financial services—something that it is impossible to be.

By contrast, when you create an investment plan, you communicate a much different message: that you are highly focused on the one aspect of their finances that most affluent clients are most concerned about—preserving their wealth. As a wealth manager, you will address this critical task first. Only after the investment plan is in place will you turn to the other aspects of the client's financial situation (using a network of experts in those areas).

A well-designed investment plan serves a number of important purposes:

• Clarifies and solidifies client's goals. Your investment plan should document key areas of the investor's profile—from values and goals to interests, family member details, overview of assets, other advisors she works with and her preferred methods for working with advisors. The most critical area for investment decision-making concerns the client's financial goals. By putting these goals in writing, the investment plan ensures that both you and the client are clear about this critical area.
  
  
• Provides long-term discipline. A well-crafted plan ensures that rational analysis is the basis for all investment decisions. The investor is thus less likely to act on emotional responses to events—something we've all had to deal with repeatedly over the past year.
  
  
• Promotes clear communication. A good investment plan clarifies the issues that are most important to the client, the investment approach and the consultative process that will be used. This level of detail can prevent misunderstandings that might otherwise arise.
  
  
• Impresses the client. The investment plan demonstrates thoughtfulness in your approach to solving your clients' financial challenges. The document reflects your thorough preparation, systematic strategy and close attention to detail—all important to differentiating yourself from the competition and boosting your chances of winning new business from investors who have defected from their previous advisors.
  
  
  

What's in a Plan?

I recommend that advisors divide the investment plan into two parts. The first is a summary of the investment consulting work that you've done with the client (through a discovery meeting, for example). This should provide an overview of the client's overall profile, your consulting process and your investment recommendations. It should also include brief descriptions of your fees, as well as your firm's background and investment philosophy.

The second part should be an investment policy statement. It should go into more detail about your investing approach and strategic portfolio management process. It should also provide summaries of the returns of key indexes and a range of hypothetical portfolios.

Between these two sections, you should cover six important areas:

1. Long-term goals, objectives and values. Long-term goals can consist of anything from retiring to purchasing a second home to achieving financial independence. Because these goals are the bedrock upon which the portfolio will be built, work with investors to define them clearly and concisely.
   
   
2. A definition of the level of risk that the client is willing to accept. Your clients must understand the amount of risk they are willing to tolerate during the investment period. In designing a portfolio, determine the absolute loss an investor can take in any one-year period without terminating the investment program. Discuss the past year and how the investor reacted to developments to help you better gauge his true risk tolerance.
   
   
3. The expected time horizon for the investments. Help your clients determine the investment periods during which their capital will be at work. The minimum investment period should be at least five years for any portfolio containing equity securities.
   
   
4. The rate of return objective and asset classes used. Identify the specific return/risk profiles of each asset class and use these ranges of returns for each risk level as the framework to determine your client's return expectation for the portfolio as well as its component asset classes.
   
   
5. The investment methodology used. Clearly state the reasons for whichever method (indexing, security selection, etc.) you recommend.
   
   
6. A strategic implementation plan. Establish parameters for periodic adjustments to the portfolio. For example, you might rebalance your clients' portfolios on a defined basis. The investment plan creates a benchmark to measure investment portfolio performance. If you have clearly defined needs and objectives, it's easier to determine how the portfolio is performing relative to those needs and objectives.

My experience working with advisors who prepare and present formal investment plans tells me that most prospects and clients will be impressed with these plans. These investors are used to the typical financial salesman pitch and will be surprised by someone who takes such a thorough and comprehensive approach. Of course, some will have reservations. Some prospects have particular investments that they want to keep for sentimental reasons, for example, or they have questions about tax considerations and fees. Encourage them to share these reservations and be prepared to address them.

Finally, the investment plan serves another important purpose: It sets the stage for advanced planning efforts that are central to overall wealth management. Advanced planning involves the non-investment-related aspects of your clients' financial lives, including wealth enhancement, wealth transfer, wealth protection and charitable giving. It's a key offering of today's top wealth managers and one of the most effective ways to bring value to clients. Your investment plan and the care it shows you bring to the client relationship is a perfect springboard to your ability to offer comprehensive advanced planning.

If you're not using this approach to create investment plans, it's time to start. If you are, the current market is an excellent opportunity to review your methods and ensure you're maximizing effectiveness. Obviously it requires a fair amount of time and effort to create a useful investment plan. But make no mistake: The time you spend will help build a practice that stands out from the crowd and allow you to capture more clients and assets than ever before.

Reprinted from: Financial Planning