AFP Chapter 2- Client Relationship and Practice Management Flashcards
Gender and Behavioural Finance
- Men and Women act differently
- Men are overconfident
- Women buy and hold
- Men 33.3% more risk tolerant
- Women susceptible to ‘hot hand’
3 Investor Personality Dimensions
- Idealism vs Pragmatism (I vs P)
- Framing vs Integrating (F vs N)
- Reflecting vs Realism (T vs R)
Idealists: Overestimate their investing abilities
Pragmatists: Realistic group of investing skills and limitations
Framers: Evaluate investments without considering how it fits in their overall portfolio
Integrators: Understand the correlation between various investors and keep them in mind
Reflectors: Difficulty living with their consequences
Realists: Have an easier time coming to terms with their consequences
Emotional Discovery
Replace financial terminology with a conversation about life issues
4 general issues
accumulation–>protection–>conversion–>transfer
6 Steps to Financial Planning Process
- Establish client advisor relationship
- Collect Data
- Analyze Data
- Recommend Strategies
- Implement Recommendations
- Periodic Reviews
1-3 are analysis of the client situation
4-6 are implement the financial plan
“End Value”
“Mean Values”
“Unified Values”
Why is a value system important?
“End Values”: Where you see your life heading in terms of goals
“Means Values”: What you need to do to reach your goals
“Unified Values”: System when means values and end values mutually reinforce each other
Value system represents what a client believes is important and need to be emphasized
Best Practical Allocation
The advisor and client consider different portfolios along the “efficient frontier”
“efficient frontier”: the most efficient portfolio at each level of risk
What are the 2 reports introduced by CRM 2
Fee Statement: Disclose all commissions and charges incurred by client during reporting period
Performance Report:
- Calculations must be performed using prescribed methodologies to ensure comparabilities
- must provide historical performance for the prior year and the most recent 3,5,10 year periods
Required Return vs Return Objective
Required Return: An estimate of the average annual return needed to meet clients goals
Return Objective: How much a client’s portfolio is expected to earn each year
“Asset Allocation” vs “Asset Location”
Asset Allocation: The percentage of the portfolio to be held in different asset classes
Asset Location: Determining which investments should be placed in which account (registered vs non-registered)
Emotional Bias
Optimism Lack of Self-Control Endowment Regret Aversions Loss Aversion Status Quo
What retirement variables are controllable and which variables are beyond a clients control?
- Number of years until retirement-controllable
- Level of income required- controllable
- Amount client can save prior and during retirement- controllable
- Investment Retirement prior and during retirement-controllable
- Amount of savings already in place- beyond controllable
- Inflation prior and during retirement-beyond controllable
What are the 3 perceptions
Select Information: select and submit things into our awareness based on interest, needs and expectations
Organize Information: we organize information so we can understand it
Interpret Information: As our mind selects and organizes information we interpret
Conflict Resolution Process
- Choose your attitude
- Listen to understand what the other person is saying
- Show empathy (understanding)
- Collaborate on a resolution
- Implement the resolution
Life Cycle Approach
- Early Earning Years (up to 35)
- focus on growth (lots of equities, little fixed income) - Mid-Earning Years (35-55)
- Focus on growth and safety (less equites, more fixed income) - Peak Earning Years (55-Retirement)
- Focus on safety and growth (less equities, more fixed income) - Retirement Years (in retirement)
- Focus on safety and income (little equites, lots of fixed income)
