The ongoing relationship helps to manage these possibly contradictory aspects of risk.
5. Prove you received the client's properly informed consent to accept those risks in pursuit of their goals.
Informed consent again! Having illustrated the client's balance sheet over time, and having taken into account extreme events and the client's financial capacity to cope, you need explicit instructions to proceed and confirmation that the client has given their informed consent to the plan and accepted the inherent risks.
This should not be confused with 'cover your a**' compliance activity. The purpose is not to defend you and your PI cover, but the purpose is to enter into a long term, 'win - win' adult relationship with clients.
Summary - The Overall Objective
Advisory businesses that have a reliable methodology for establishing clear client expectations and meeting those expectations will continue to grow their businesses in trying times.
This may well be at the expense of those that rely on investment outperformance as their primary offer. Clients and those that refer clients to an advisory business need to be confident that the advisory business will be there in both the good times and the bad.
Emphasis on investment returns only is an indicator that the firm may not be there for the troubles ahead. Evidence of a robust advisory process and evidence of a high level of client persistency will indicate a higher eventual value to the business, but, more importantly, a better overall client experience.
So, the challenge to advisors is: Does your process deliver the five proofs?
Geoff Davey, co-founder of FinaMetrica, has an international reputation for expertise in risk tolerance and its role in the financial planning process. A pioneer of financial planning in his native Australia, Davey has been a part of the financial services industry for 37 years. He can be reached via FinaMetrica's information portal, www.riskprofiling.com.