"In every study we have done, advisors who were consultative had significantly higher incomes than those who were product-oriented."

An IPS That Will Keep Them for Life

By John Bowen

The key to building a hugely successful advisory business is to develop great relationships with your clients. It will give you a significant competitive advantage and maximize your creation of equity.

Most financial advisors are trained to sell financial products rather than sell a consultative service. The difference between the two is more than semantics. It can mean the difference between having a short-term relationship with a customer or a long-term relationship with a client and thousands of dollars of income to you. Indeed, in every study we have done, those advisors who were consultative in their practice had significantly higher incomes than those who were product-oriented.

At the heart of the consulting process is the Investment Policy Statement. Follow these essential steps to creating an IPS that will help keep your clients for life.

1. Set long-term goals and objectives.
Long-term goals can consist of anything from early retirement to purchasing a new home to achieving financial independence. Because these goals are the bedrock upon which the portfolio will be built, work with the client to define them clearly and concisely.

2. Define the level of risk clients are willing to accept.
Determine the absolute loss they would accept in any one-year period without terminating your investment program. The best way to do this is to calculate an analysis of how the recommended portfolio would have performed during the recession years of 1973-74. Ask your clients if they would have closed their accounts because of that downturn. If they would, they are taking too much risk and should consider a lower risk model portfolio.

3. Establish the expected time horizon.
Help each investor determine the investment period in which their capital will be placed. The minimum expected investment period should be at least five years for any portfolio containing equity securities.

4. Determine the rate of return objective and select asset classes.
Your return range should be consistent with the expected rate of return of your portfolio asset classes over the past 20 years. Use expected rates of return and make clear that these are historical returns that are in no way indicative of future returns. List all the different asset classes you might want to consider in your portfolio. Don't assume that what you've used in the past is still what you should use now.

5. Document the investment methodology.
There are three basic investment methodologies: security selection, market timing and asset class investing. Clearly state the reasons for whichever method you recommend.

6. Establish a strategic implementation plan.
Creating an investment road map is an essential step for investors in successfully managing their own expectations. To be successful, you must take full responsibility for your clients' investment portfolio decisions. The IPS will enable you to better define your clients' investment expectations and put you in a position to decide how best to implement your asset class portfolio.

Reprinted from: FINANCIAL PLANNING