Q25: "Performance Envy" part 2.

This last question helps reframe the prior response by reminding the client that the go-go portfolio A might well have taken a significant tumble instead of a rocket rise.

Q24:"Performance Envy" part 1

This is a follow up question with Q23, and addresses the problem of “performance envy”. If the client indicates he will switch the portfolio, FP is to educate client on the difference between trading and portfolio planning.

Q23: Possible ranges of portfolio value.

This question is designed to prepare client on the possible outcome of portfolio value. It is aim to detect the difference between client’s profess risk tolerance and actual risk tolerance as depicted in the question.

Q22: Contingent liabilities

This question is designed to further educate client on the impact of liabilities can cut-short the time horizon of the portfolio pre-maturely. The wording is similar to Q20.

Guarantor: If client is a business owner, this situation is common. FP needs to be sensitive to this.

Creditor Situation: Depending on the degree of the situation, an investment into an irrevocable trust fund would be more appropriate.

Margin Call: This situation arises when client pledge his shares to a bank for a credit facility, usually for further investment. If the value of the pledged shares fall to an undesirable value, the bank would demand client to top-up the difference, otherwise the shares would be force sell, and bank would claim the difference from client. This situation usually happens to HNWI.

This question (& Q20) will assist FP to link investment planning to other parts of financial planning.

Q21: Now you a test to take....

This question is designed to explain to client the difference between risk averse and loss averse.

It is very rare that the client does not choose (a) in question #1. We then uncover question #2 and ask client to make a choice between (a) and (b). It is very rare that the client does not choose (b). We use this opportunity to explain the difference between risk averse and loss averse. We tell the client that we understand their concern with risk. In question #1, client does not wish to take a risk in order to earn more money. However, in question#2, client would take a risk to avoid losing money. For example, in real life, inflation risk can eat into client’s wealth, which could mean loss of wealth to sustain client’s standard of living in the long term.

Q20: Life transition events

This question is designed to address life transition issues, which would cut-short the time horizon of client’s portfolio pre-maturely. FP should be sensitive not only on the client’s transition event but also of his dependents’ life transition event, for example parent’s death. Special event includes divorce, creditor situation etc. Client is encouraged to describe about the potential issues. This question provides the link between investment planning to other parts of financial planning.

Q19: How often to do you review your investment?

The first part of the question is designed to prepare client’s expectation realistically, and emphasize the benefit of the quarterly review. Client can monitor daily or weekly, the FP could schedule a formal review quarterly. The quarterly review is to objectively compare the goal with current portfolio performance.

The second part of the question is designed to help client sees the bear market in an objective perspective. In an unplanned situation, client will be fearful in a bear market. The purpose of this question is to allow FP to help link the client’s goal to the market performance.

If the current timeline to planned time horizon is still very far, a re-balancing decision could be triggered to expose more onto the equity portfolio.

If the current timeline to planned time horizon is very near, then a re-balancing decision could be triggered to expose more onto the fixed-income portfolio.

Q18: I would rather be out of the market....

This question is designed to address market timing issue. We discourage market timing and we require our clients to acknowledge that they are prepared to accept the reality that they cannot market-time. This question simply points out that if the client wishes to participate in the positive periods of the market he must be prepared to also accept the down periods. Should a client ever indicate that he cannot live with the volatility of the equity market, we explain that the only alternative is an all deposits portfolio which, in all likelihood, will not provide a return adequate to meet his long-term goals.

Q17: "If my portfolio produces a long term return of ...I am prepared to live with a time recovery of...."

This question goes straight to the heart of market volatility and its emotional power. The description emphasizes that even investors in the bond market have gone through periods in which their portfolio would have had to wait a few years for positive returns. Stock markets have had bear market lasting for as long as 4 years. With the historical warning that there is no way of protecting against bear markets, we then ask how long they will be able to maintain their wits if their portfolio has an extended loss. We explain that we are talking in terms of 12 month periods and not the day after Black Monday. For example, if they invested their money on 1st Oct 2008, a 2 year down market would mean that the portfolio value would be less on 1st Oct 2010.

We then allow the client to choose “less than 1 year”, “between 1 and 2 years”, “between 2 and 3 years”. Note that if anything less than “between 2 and 3 years” is checked, we ask the question, “Are you prepared to substantially reduce your goals?” We explain that if he checks anything less than 2 years, our recommendation would have to be that his funds be placed in fixed-income investments (or similar financial products) with maturities of less than 2 years. Otherwise, any other combination is likely to exceed the client’s risk tolerance, which will be no good for the client.

Q16: Investment "risk" means different things to different people.

This question is designed to educate clients regarding the many dimensions of risk, including the risk of losing their standard of living or not meeting their goals, and the risk of not sleeping well (i.e. market volatility). The 1st two items address the issue of returns. We emphasize that their goals are accomplished by earning an appropriate real rate of return, not by earning an arbitrary fixed target return. Item 3 helps clarify for the client that short term volatility is a reality that he has to live with.

Q15: Up to what % of this portfolio can be invested in long term?

This question asks the same thing as Q14 in a different way. It is purposely designed in this way. During the client interview or review process, this question is used to educate, remind and prepare client for the need to see through the financial goal time horizon.

To the FP, this question also serves as a comforting reminder in future. When the market has turn nasty, FP will pull out this questionnaire and flip to this question to remind the client that he need not panic. His portfolio is designed with the knowledge that they would not be forced to liquidate at the bottom.

Q14: What % of your investment are you likely to need within 5 years?

You will note the similarities between this question with Q7 and Q8. There is no mistake in this. This is to communicate the importance of adopting a reasonable time horizon for investment. (In this case is 5 years)

Q13: Asset class constraints

This question is designed to allow client to air out any bad experience on any asset class. This allows the FP to exercise judgment in planning an asset allocation plan for the client. For example, if the client has bad experience in “MiniBond” (a type of structured product), FP should take the time to explain the difference between bond fund and “minibond”; otherwise, the bond fund should be put on hold until the client is comfortable with them.

FP should not force the product into the portfolio which client has indicated “to be avoided”.

Q12: For each of the attrributes, circle the number most correct reflects your level of concern.

This question looks simple but is designed to in 2 structures. First, the client is not constraint in prioritizing the 6 different attributes. He may rate each one as strongly or as weakly as he desires. By not forcing the client to prioritize, we find that it let him focus on each attribute individually. He is not restricted by the impact a choice for one attribute may have on his ability to weight the remaining attributes.

The next component of the structure is the order in which the attributes are listed.

Capital preservation: Client will frequently read this and circle “6”. FP should not be surprise at this.

Growth: Most clients will want to have some growth on their portfolio. As they circle this attribute, they began to know the conflicting goals with the response in Capital preservation. FP will use this opportunity to bring out the discussion on multiple forms of investment risks.

Volatility: Listing volatility allows FP to discuss risk measurement and to distinguish between volatility and capital loss. FP should prepare a list of past volatility of the funds or asset class to show client. Finally, FP should relate the concept of volatility to their investment time horizon, and link the client back to Q7, Q8 and Q10.

Inflation protection: Most clients will circle “5” or “6”. FP would use this opportunity to address the conflict between inflation protection and capital preservation. Most clients will understand that not many investment plans can satisfy the 2 attributes at the same time.

Current Cash Flow: Most clients, when asked, automatically assume that they require cash flow from the investment portfolio. FP can take this opportunity to discuss with the client the NEED for cash flow versus the DESIRE for cash flow. Because any early withdrawal from capital will affect the final goal (or objective) this investment is designed for.

Aggressive growth: This is purposefully included as the last attribute. We started with capital preservation and ended with aggressive growth. Aggressive growth refers to aggressive strategy to trade on the market. Most clients will choose a low number on this. If client chooses a high number, FP has to gauge whether client is suitable for portfolio investment which generally don’t fancy aggressive growth strategy.

Q11: Client's goal for this portfolio is an annual return of?

This question is designed to understand client’s expectation. In some instances, client could highlight an unrealistic figure. FP can take this opportunity to show the long-term historical returns of various assets, funds and inflation figure to client. This could help to level up (or down) the expectation of both client and FP.

Q10: What's the portfolio time horizon?

This question is designed purposely to mirror that of Q8. It is important to reinforce the time horizon of the portfolio, so FP asks the same question in a little different way.

It is not unusual to find client answered Q7 and Q8 with a “No”, only to answer Q10 with the choice of 3 years. Such contradictory responses bring the client’s concerns out into the open.

In order to facilitate the FP-client discussion, the client is requested to describe when the fund will be needed if anything less than 10 years is selected. FP can then educate to client that the time horizon is a crucial parameter in investment portfolio planning.

The issue of time horizon in pre-retirement and post-retirement planning will be a separate module to be trained to FPs.

Q9: Have you set aside 6 months of cash reserve?

This question is designed to remind the need to allocate part of client’s wealth into risk free financial product for emergency. If the answer is no, FP should have the integrity to stop the investment process and assist client in this area. This is the spirit of Financial Advisor Act 27.

Q8: Will significant cash withdrawal of principal be made over the next 5 years?

This question follows up with Q7 to re-inforce the “5 years” rule. Investing in portfolio should have at least 5 years which is approximately the duration of a business cycle. Therefore, it is important to re-affirm client’s lump sum needs in the near term.

For example, if the client intends to withdraw $25K in 2 years for his daughter’s wedding, it would be inappropriate to invest this sum in long term investments. FP can communicate to the client: “Let’s carve out the $25K and decide how to invest it later. I want you to be comfortable that you’re not likely to need any of the funds from your investment portfolio for at least the next 5 years.” FP then go back to Q4 to adjust the amount entered.

Q7: Is there an immediate need for income from this portfolio?

This question addresses the need for cash flow in the near term, and serves as a confirmation of how important client’s goal is (as replied in Q1). If the answer is yes, FP should lead client back to Q1 and seek client’s opinion on the goal he/her has set.

Q6: If your portfolio has changed over time.

This question is an extension of Q5, and it gets to the heart of your client’s investment rationale. By offering client a number of choices to explain portfolio allocation changes, you can uncover important elements of client’s investment philosophy and history.

FP should try to use as far back a time line as possible, because most bad experience establish its strong footing in the beginning. Otherwise, client should at least describe the past 5 years portfolio allocation changes.

Q5: How would you describe your portfolio allocations?

This question is designed to understand client’s investment behaviour. Use client’s response in Q2 to follow through in this question. FP should be sensitive to detect any bad experience client has had in the past. Allow client to speak out on these experiences.

Q4: What is the approximate value of this investment portfolio?

This question is designed to ask for a dollar value which the FP will use to develop the portfolio and IPS. The FP needs to know how this investment portfolio fits within the overall framework of the client’s assets; hence the second part of question 4 is followed up.

If this portfolio is part of the larger portfolio (i.e. client answers “20%”), the FP should think through how this portfolio can compliment the client’s overall wealth. If client answers 100%, then it is important to determine whether plans have been made to provide for emergency reserves and short term cash needs.

(This will form the “Present value of capital” in the IPS)

Q3: Please estimate the approximate value of your liabilities.

This question is designed to understand the liability situation of the client. By having assets (in Q2) – liabilities, FP will have a good gauge of the client’s net-worth.

FP should be sensitive to client’s “contingent liabilities”, and assist client in making provision for such liabilities by using tools and techniques to isolate or eliminate such threats away from client’s wealth as much as possible.

FP should also be sensitive to detect whether there is an over-concentration of liabilities in one or two financial institutions. Under Singapore’s situation, banks have the right to off-set client’s assets to pay off debts. On this basis, FP should advice client on the importance of separating holding companies for assets and liabilities.

(This input will be shown as “risk capacity” in the IPS)

Q2: Please estimate the approximate the value of your assets.

This question is the first step towards net-worth analysis which will reveal client’s risk capacity (which is different to risk tolerance). It is design to allow FP to understand the degree of diversification of the asset class and institution, or the lack of it; the amount of investible assets; and whether client has made plans on emergency reserve and insurance. Without emergency reserve and insurance, client will not have the staying power to withstand investment volatility.

Q1: What is the purpose of this investment?

All planning exercises, financial or otherwise, must produce a concrete goal. Without a goal, such planning activity is merely a dreaming exercise. In most cases, it will lead to unhappy client-advisor relationship. A goal sub-consciously instils discipline which help aligns the client’s limited resources towards a direction meaningful to him/her.A meaningful financial goal should have 3 items. First, be quantified into a dollar value; second, has a specific time horizon; third, a priority.This question is designed to enable client to think through meaningfully the purpose of investing, and its eventual beneficiary. FP should facilitate client in this process of helping the client to formulate the goals using credible financial planning techniques.

During the process of formulating the goals, FP should advise the client to place the money intended for investment in a risk free product, like saving deposits.

This financial goal will set the stage for asset allocation, re-balancing and portfolio release point decisions, and be prominently featured in the investment policy statement for subsequent review.

In situation where the FP exits or retires from the business, this information will also facilitate succession planning for the benefit of client and FP.

In situation where the economic cycle is heading south, this information will also be important for re-balancing or portfolio exit decision.

(This input will form the "Objective" in the IPS)