Client discovery, goals and risk profiling
Know the client, not just the numbers
Discovery collects goals and priorities, financial position (income, assets, debts, insurance), the time horizon for each goal, liquidity needs, existing products including KiwiSaver, knowledge and experience, health and dependants, and preferences such as ethical or ESG screens. Soft facts matter: a client supporting a parent has less capacity for loss than the balance sheet alone suggests.
Three kinds of risk
Tolerance is attitude, how the client feels about volatility. Capacity is ability, whether the portfolio can survive a 20% fall without derailing the plan. Required risk is need, the return the goals actually demand. A recommendation that satisfies tolerance but not capacity is unsuitable.
Worked example
A 55-year-old earns $120,000, has $300,000 invested, a $250,000 mortgage, no emergency fund, and needs $50,000 in three years for a child's study. Her questionnaire scores growth. The adviser moves to a balanced allocation and ring-fences the $50,000 in cash and short-dated bonds. Reasoning: tolerance is high, but capacity is squeezed by debt and a short-dated cash need; a growth fund falling 25% in year two would force a sale at a loss.
Traps
- Treating a questionnaire score as if it were the recommendation.
- Ignoring a goal's date: a three-year goal cannot be funded by equities just because the client is relaxed.
- Skipping the emergency fund.
- Not recording why the final allocation differs from the questionnaire result.