What Questions Every Investor Must Ask Before Taking on a New Client
As an investor and financial advisor, one of the most important decisions you will make is choosing which clients to work with. Just as an intelligent investor carefully analyzes a company before purchasing its stock, a prudent advisor must thoroughly vet potential clients before agreeing to manage their assets.
In my decades of experience, including running my own investment partnerships, I've found that asking the right questions upfront is critical to building successful long-term client relationships. It allows you to understand the client's goals, temperament, and whether they will be a suitable fit for your investment philosophy and business.
While every advisor-client relationship is unique, here are the key questions I believe every investor should ask before taking on a new client:
1. What are your investment goals and time horizon?
Understanding a client's objectives is foundational to determining if you can help them achieve those aims. Are they investing for retirement decades away or looking to fund a child's education in a few years? Is capital preservation paramount or are they comfortable with more risk in pursuit of higher potential returns?
Knowing the purpose and timeframe of the investment is crucial, as it dictates the appropriate strategy and types of securities to employ. As I wrote in The Intelligent Investor, "The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator's primary interest lies in anticipating and profiting from market fluctuations. The investor's primary interest lies in acquiring and holding suitable securities at suitable prices."4
An intelligent investor must have a firm grasp on which camp a prospective client falls into. Short-term speculators are unlikely to be a good match for an advisor focused on long-term value investing principles.
2. What is your risk tolerance?
Hand-in-hand with investment goals is the client's appetite and capacity for risk. Some can stomach (financially and emotionally) the volatility inherent in more aggressive portfolios, while others will panic and sell at the first sign of trouble.
As I wrote, "The investor's chief problem – and even his worst enemy – is likely to be himself. In the end, how your investments behave is much less important than how you behave."4 A client who cannot control their emotions during inevitable market downturns will not be able to adhere to a rational investment program.
It's critical to assess a client's true risk tolerance and ensure they understand how much risk is involved in the strategy you would employ for them. "The risk of paying too high a price for good-quality stocks – while a real one – is not the chief hazard confronting the average buyer of securities. Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions," I explained in The Intelligent Investor.4
3. What is your current financial situation?
An in-depth review of a potential client's current assets, liabilities, income, expenses and insurance is essential to developing an appropriate investment plan. Do they have adequate cash reserves and insurance coverage? Are they carrying high-interest debt that should be paid down before investing? Is their income sufficient to meet their spending needs or do investment returns need to be relied upon?
A client's overall financial health must be taken into account rather than viewing the investment portfolio in isolation. "There is a close logical connection between the concept of a safety margin and the principle of diversification. One is correlative with the other. Even with a margin [of safety] in the investor's favor, an individual security may work out badly. For the margin guarantees only that he has a better chance for profit than for loss – not that loss is impossible," I noted.4
4. How much are you looking to invest?
The size of a client's investable assets is an important consideration. Advisors typically have account minimums to ensure a relationship is mutually beneficial given the time and resources required to manage a portfolio.
Additionally, the amount of assets will impact what investment vehicles and strategies can be practically implemented. For example, proper diversification is difficult to achieve with a small sum, as I pointed out in The Intelligent Investor: "There is a close logical connection between the concept of a safety margin and the principle of diversification. One is correlative with the other. Even with a margin [of safety] in the investor's favor, an individual security may work out badly."4
5. What is your investment experience and knowledge?
Gauging a client's level of financial literacy is key to productive communication and setting realistic expectations. Do they understand basic concepts like diversification, asset allocation, and risk-adjusted returns? Have they previously invested on their own or worked with another advisor?
"The investor's chief problem – and even his worst enemy – is likely to be himself. In the end, how your investments behave is much less important than how you behave," I cautioned.4 Clients with little investment knowledge may require more education and guidance to stay the course during market volatility.
On the other hand, experienced investors may have preconceived notions or biases that need to be addressed. "Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed," I warned.4
6. What are your return expectations?
Unrealistic return assumptions are a recipe for disappointment. In The Intelligent Investor, I argued that "the investor should have a definite selling policy for all his common stock commitments, corresponding to his buying techniques. Typically, he should set a reasonable profit objective on each purchase - say 50 to 100 percent - and a maximum holding period for this objective to be realized - say, two to three years."4
However, such returns are by no means guaranteed. "Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings. There are two possible ways by which he may try to do this: the way of timing and the way of pricing," I explained.4
It's crucial that clients have a realistic understanding of potential returns and the inherent uncertainty involved. "The investor can scarcely take seriously the innumerable predictions which appear almost daily and are his for the asking," I wrote. "Yet in many cases he pays attention to them and even acts upon them. Why? Because he has been persuaded that it is important for him to form some opinion of the future course of the stock market, and because he feels that the brokerage or service forecast is at least more dependable than his own."4
7. How much are you willing to pay in fees?
Fees can significantly impact net returns, so it's important to discuss them upfront. Advisors should clearly explain their fee structure, what services are included, and how the fees will be calculated and paid.
Clients should understand that lower fees do not necessarily equate to better value. As I wrote, "The kind of securities to be purchased and the rate of return to be sought depend not on the investor's financial resources but on his financial equipment in terms of knowledge, experience, and temperament."4
Comprehensive financial planning and individualized advice may justify higher fees than a robo-advisor or discount brokerage. The key is that the fees are fair, transparent, and aligned with the value provided.
8. How often do you expect to communicate with your advisor?
Establishing communication expectations early on can prevent misunderstandings down the road. Some clients expect frequent updates and enjoy being actively involved in investment decisions. Others prefer a hands-off approach and only want to hear from their advisor periodically or when something needs attention.
There is no right or wrong answer, but it's important that the advisor and client are aligned. An investor who craves constant contact will be frustrated with an advisor who prefers annual meetings. Likewise, an advisor who wants to actively strategize with clients may not be a good fit for the "set it and forget it" type.
"The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator's primary interest lies in anticipating and profiting from market fluctuations. The investor's primary interest lies in acquiring and holding suitable securities at suitable prices," I wrote.4 Frequent communication is more important for a speculator, while an investor may be content with less.
9. What are your expectations for our working relationship?
Beyond communication, it's wise to discuss the overall expectations and responsibilities of the advisor-client relationship. How involved does the client want to be in developing their financial plan and investment strategy? How much discretion will the advisor have in making portfolio decisions? What other financial professionals (accountants, attorneys, etc.) will need to be consulted or collaborated with?
"It is an old joke that a stockbroker is someone who invests other people's money until it's all gone. I mentioned this to a wealthy friend once and he said, 'I don't get the joke - isn't that exactly what a stockbroker is supposed to do?' Doctors don't promise to make you live forever. Lawyers don't promise to win every case. But stockbrokers and financial advisors routinely promise the equivalent of investment miracles," I wrote in the commentary to The Intelligent Investor.4
Setting clear expectations from the outset can help avoid such misunderstandings and build a foundation of trust. The client should view the advisor as a knowledgeable partner who will act in their best interest, not a miracle worker with a crystal ball.
10. Are you comfortable signing a client agreement and providing necessary information?
Finally, the advisor should walk the client through any agreements and disclosures they will need to sign, as well as what personal and financial information they will be required to provide. This includes things like the advisor's Form ADV, privacy policy, and client questionnaire.
"The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator's primary interest lies in anticipating and profiting from market fluctuations. The investor's primary interest lies in acquiring and holding suitable securities at suitable prices," I explained.4
A client who balks at providing basic information or signing standard agreements may not be ready to work with an advisor. Trust and transparency are essential to a productive relationship.
In summary, taking on a new client is a significant decision that should not be made lightly. Asking the right questions upfront can help ensure that the advisor and client are well-matched and positioned for a successful long-term partnership.
As I wrote in The Intelligent Investor, "If you have built a well-diversified portfolio of high-grade bonds and stocks, and if you have the wisdom and courage to stick with your investment program through thick and thin, you are highly likely to get good results over time. But day-to-day or even year-to-year variations in market prices are essentially random and unpredictable."4
By carefully vetting clients and setting clear expectations, advisors can focus on what matters most – prudently managing portfolios to help clients achieve their long-term financial goals. This disciplined, patient approach is the hallmark of the intelligent investor.
References:
https://en.wikipedia.org/wiki/The_Intelligent_Investor
1 https://www.magicblog.ai/post/the-ultimate-2024-guide-to-creating-seo-optimized-articles-for-your-blog
2 https://www.everand.com/book/168907403/The-Intelligent-Investor-Rev-Ed-The-Definitive-Book-on-Value-Investing
3 https://nisonco.com/seo-blogging-best-practices-2024/
4 Graham, B. (1949). The Intelligent Investor. Harper & Brothers.
5 https://www.grahamvalue.com/blog/quotes-warren-buffett-and-benjamin-graham
6 https://monevator.com/benjamin-graham-on-bear-markets/
Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy. It is important to note that federal tax laws under the Internal Revenue Code (IRC) of the United States are subject to change, therefore it is the responsibility of taxpayers to verify their taxation obligations.
Savvy Wealth Inc. is a technology company. Savvy Advisors, Inc. is an SEC registered investment advisor. For purposes of this article, Savvy Wealth and Savvy Advisors together are referred to as “Savvy”. All advisory services are offered through Savvy Advisors, while technology is offered through Savvy Wealth. The views and opinions expressed herein are those of the speakers and authors and do not necessarily reflect the views or positions of Savvy Advisors.
