FINspeak

I still remember when I opened my first mutual fund account, I had to fill in a form with questions like: which asset classes I prefer, what are my financial  goals, what is my view of risk etc. Many of these questions I didn't understand then and selected the option which was most politically correct!! And believe it's the same case with majority of the clients from Mass Affluent and HNI segments, who due to lack of time or interest or sheer ignorance just provide some random information.

But regardless of this fact, this information is used by banks and financial institutions to stereotype the client into segments or rather water tight compartments (i.e. risk averse, risk taking, aggressive, etc.) which have direct implications on the portfolio composition. And when I say direct in some cases we even see the client portfolio is 100% driven by this segmentation regardless of the actual client expectations or needs!! Off course these implication are never clearly known to the prospective clients!!

And thus in short, provides a "shaky start" to the client relationship with mismatched expectations. With the advisor thinking the client belongs to say "Risk tolerant" category (since he is only 25, single and just started working!!)  and thus allocating as much as 70% of the client portfolio in equity, whereas the client needs funds in the next year for his own higher education!!! The result distrust and loss of client relationship in extreme cases.

 I guess it's time financial advisory firms start treating a client like an "individual entity" and not makes any efforts to stereotype him\her into categories on the basis of answers to few generic and rigid questions. Client profiling as a concept is a great tool for the wealth managers, it saves the mammoth effort of analyzing each client profile under a microscopic view! But it also has a great potential to mislead if it's not used and implemented properly.

I would divide the whole client profiling process into the following steps:

1.    Basic data collection: mostly based on questionnaire and initial client interactions

2.    Getting to know each other: studying the current position of the client i.e. what he does, needs, aspirations, responsibilities etc.

3.    Initial profile creation: Analyzing the inputs and creating the client profile

4.    Regular Review: Timely and also triggered by social economic events i.e. marriage, child birth, retirement, job change etc.

Most client advisors go wrong in the first step itself, when there questionnaire does nothing but frustrate the potential client with a long list of questions. The questionnaire presented to the client should be:

• Simple to understand: Not assuming much about what the client already knows or does not know.
• In sync with his\her financial status: I recommend questionnaires based on the client segment i.e. different set of questions for mass affluent, HNI and UHNI clients.
• Explained properly with a complete walkthrough before the client fills it
• Questions should be more objective yet provide a chance to list out the special requirements of the client.
• Should be updated periodically based on client feedback and changing market demographics.

The second step should be used by the client advisor to make any obvious corrections in the mistakes or misrepresentations made by the client in the first step. A very good example here would be fact that a lot of clients sometimes conceal their gross income, thinking it might attract other implications (read taxes)!! But it can be seen in the client lifestyle and investable surplus.

The next step is very important from backend and profile modeling prospective, wherein the actual client profile is derived. For me what is of prime importance here are the factors considered and the weight ages allocated to them. This is something which would need to constantly evolved based on the market conditions, changing client socio-economic needs and the sentiment of the market in general both at a local and international level. Also firms should not shy away from introducing new levels or segments based on the profile analysis over a period of time.

Finally the step which is mostly forgotten: Review. Most client profiles once created are not touched for years together, during which the client needs have changed but his/her, portfolio is not aligned to meet them. With client become increasing aware of the market in general and demanding nothing but the best, client profiling can no longer be ignored as just a basic step in the whole financial planning process. It should be used a foundation to build a strong input for the portfolio composition and maintenance.

What do you think, should the client profiling be used as it is today or its time to revisit its significance and impact on business??? Let me know your thoughts......