Analyzing Prospective Client Portfolios in 4 Steps

Posted by Brian Brelinsky

April 7, 2015 at 10:00 AM

analyzing prospective client portfoliosHere's a common scenario: at the end of a productive meeting, a prospective client hands you a pile of his current investment statements. You haven't yet secured his business, so analyzing these documents will be crucial in convincing the prospect to leave his current advisor.

There are many ways to approach this task, but to simplify the process, I've outlined four steps for analyzing prospective client portfolios. The goal is to get the data you need to continue your dialogue—and make a case for the prospective client to join your firm.

Download our free article on human vs. financial capital to help you analyze client portfolios for younger investors.

Step 1: Who's the Client?

The first (and possibly the most important) step is to assess the prospect. Reviewing his or her investments in a vacuum limits the amount of value you can offer. Instead, look at the investments contextually, based on the prospect's current (and future) goals, risk tolerance, and time horizon. You can gather this information informally (e.g., taking notes during your meeting) or with a more formal approach (e.g., using a client intake form).

Step 2: What Investments Does the Client Have?

With the prospect's needs as your frame of reference, investigate his or her current assets. Of course, some information will be detailed on statements, but you might consider using a research tool (e.g., Morningstar® Advisor WorkstationSM) for additional data. Starting at a high level and drilling down, here are some topics and questions to review:

Overall asset allocation. What are the general equity and fixed income amounts (and percentages)? Are there alternative investments? Is this mix of equities, fixed income, and alternatives appropriate for the prospective client's goals and risk tolerance?

Asset class exposure. Is there appropriate diversification among the various equity asset classes? Are the relative weights consistent with similar models you may use (e.g., those from Ibbotson Associates)? Is the fixed income exposure weighted appropriately for the current and expected future interest rate environment?

Overweight/underweight sectors and regions. Is there a concentration in (or lack of exposure to) a particular industry or global territory? How does this affect the portfolio's risk profile?

Security type and tax. Is the prospect invested in mutual funds, exchange-traded funds, and stocks? Are there closed-end funds, unit investment trusts, or individual bonds with which you aren't familiar or experienced? Does the statement indicate any large taxable gains that should be addressed?

Step 3: What Are the Key Features of the Investments?

To look deeper into investment characteristics, you'll want to use various metrics. I've highlighted some here, but tailor your review to those most relevant to the potential client's scenario.

Yield. How much income are the investments generating, and where is it coming from (equity dividends, fixed income interest, etc.)? Is this level of income meeting the prospect's current needs? Will it be enough as his or her needs change in the future?

Fixed income characteristics. Review the credit quality and effective duration measures. Are they appropriate for the current fixed income environment?

Fund review. Are the fund expenses reasonable? Do you have access to lower-cost versions of the same funds? How have the funds performed relative to their peers?

Modern portfolio theory (MPT) stats. Of course, you can get as deep into the weeds with MPT as you like. But I've narrowed it down to a few metrics that are worth reviewing:

  • Standard deviation (the portfolio's risk or volatility)
  • Beta (the degree to which the portfolio moves in relation to a benchmark)
  • Alpha (measure of a manager's performance beyond what can be attributed to following a benchmark)

Trailing returns. Once you've reviewed the portfolio's other characteristics, it's time to look at trailing return calculations. It may seem counterintuitive to review these last, but doing so can provide valuable perspective on the prospect's situation. It will give you a sense of what the expected returns should be and then confirm that performance is appropriate.

Step 4: Where Are the Opportunities?

An effective way of identifying areas of opportunity is to tie together the client assessment and portfolio analysis. Look for any obvious disconnect between the prospective client's goals (and risk tolerance) and the asset characteristics. Simply put:

  • Are these assets appropriate?
  • Are the assets meeting the prospect's current and future goals?

To strengthen your case, it helps to identify any actual deficiencies, potential risks, or room for improvement. This might include, for example, the equity/fixed income mix, a particular asset class (or security) that is over- or underweight, insufficient income, excess risk, or high fund expenses.

But what if you find that the prospect's current investments are actually good? This may seem like a stumbling block, but it doesn't have to be. Avoid formulating a "story to tell" that just isn't there—you certainly don't want to make competing on performance your only value-add. Instead, be up front and honest with the potential client from the start, which will go a long way toward developing trust. After delivering the news that the prospect's investments are in good shape, you can lead the conversation in a few directions:

Plan for future goals. It may be that the current allocation has served the prospect well in the past. Still, now could be the time to adjust the investments to help meet goals going forward (e.g., as the prospect nears retirement).

Take profits and de-risk. The prospect's allocations may have performed really well lately, in part due to the run-up in equities we've seen in the last few years. Consider locking in some of this growth and reallocating to de-risk the portfolio, in case the markets pull back and erase the gains.

Review internal fund expenses. If internal fund expenses are high, you may be able to offer lower-cost institutional shares of the same (or similar) funds. This way, the prospect's cost of ownership will be reduced.

These are just a few ways to articulate the value you can bring to a portfolio that's currently performing well. But don't forget that the investor is meeting with you for a reason—and it's most likely not related to investments or performance.

Get Personal

According to Spectrem Group's 2014 Affluent Market Insights report, the most common reasons that clients change advisors are all service oriented:

  1. Not returning phone calls in a timely manner
  2. Not returning e-mails in a timely manner
  3. Not being proactive in making contact

Personalized service and providing offerings that prospects aren't currently receiving (e.g., such as comprehensive financial planning) can be exactly what earns you their business. By performing a strategic assessment, you can demonstrate your value to the prospective client, no matter the state of his or her current investment portfolio.

Are there additional steps you take when analyzing prospective client portfolios? In your experience, what reasons do clients give for changing advisors? Please share your thoughts with us below.

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