Ever Wonder How Financial Advisors Research The Products And Services They Offer?

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Financial advisors and wealth management professionals research the instruments they entrust to grow and protect their clients’ funds so that their clients don’t have to. This much is clear.

What’s less clear to many wealth management clients, particularly those seeking financial professionals’ services for the first time, is how wealth managers research and select the products they offer. Why does one fund make the cut when another, superficially similar fund does not?

Hands-on wealth management professionals like San Francisco-based financial advisor Daniella Rand emphasize quality and consistency while tailoring portfolios to clients’ individual needs and goals. But, just as every clients’ individual needs and goals vary, so too does every financial advisor’s process. Without getting too specific about what those processes entail, let’s look at some general practices and procedures that many financial professionals use to build client portfolios.

It (Should) Start With the Client

Every portfolio starts with a conversation — specifically, a conversation about the client’s risk tolerance and ability to endure prolonged market downturns (risk capacity). Most advisors ask prospective clients to complete risk tolerance assessments to identify their investment preferences; many clients simply haven’t thought much about these matters.

Financial advisors must also ascertain client needs and goals before beginning the portfolio-building process. Factors that may influence these goals include client age, marital status, family size, homeownership status, geography, and more. 

Common Research Tools and Strategies

Financial advisors use these common research tools and strategies to find and evaluate suitable investment instruments for their clients.

  • Research Reports. Reports compiled by reputable firms like Morningstar form the basis of most advisors’ portfolio-building research. These reports are typically exhaustive, covering everything from return on investment relative to benchmark averages to fund managers’ professional backgrounds.
  • Market Analyses. Financial advisors run asset- and sector-based analyses to determine the appropriate portfolio mix for each client within the constraints of the advisor’s (or his or her firm’s) investment philosophy, standards, and process.
  • Screeners. Like retail investors, financial advisors often use screeners to build suitable portfolios. Screening tools filter out unsuitable options from the pool of available instruments; advisors and investors themselves can screen on the basis of return on investment, quality rating, fees, and other factors.

What’s a Monte Carlo Simulation?

One asset selection technique worth calling out, in part because it’s so memorably named, is the Monte Carlo simulation. The Monte Carlo simulation is a common, though not necessarily ubiquitous, technique used by many financial advisors to assess the relative probability of a given portfolio’s or financial plan’s success or failure based on all available information.

The simulation’s output is a statistical distribution that incorporates a wide variety of possible outcomes, coupled with an overall probability of success or failure. For more about the technical framework of the Monte Carlo situation (and how to run one yourself), check out this helpful article.

Do You Know What’s in Your Portfolio?

You shouldn’t work with a financial professional you don’t trust; this much is clear. But all the trust in the world can’t make up for proper due diligence. As the client, it’s on you to learn precisely what’s in your portfolio, and to ask probing questions of your financial advisor if and when you’re not sure that a particular instrument or weight is aligned with your stated goals or risk tolerance. 

After all, you’re the boss. It’s time to act like it.

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