ACap employs a holistic approach to advising our clients. By working closely with each of our clients’ CPAs, attorneys, and other professionals, we ensure all financial decisions work together in the client’s best interest. ACap uses a multistep and highly customized process for understanding clients’ goals and objectives before any investment decisions are made. New clients undergo the following steps:
This is an opportunity for ACap and the client to meet and discuss the initial reasons for seeking a financial advisor; ACap will introduce its services and explain its process, investment philosophy, fees, and why it operates as a Fee-Only financial advisor. At this meeting, we ask the prospective client to complete or provide the following documents:
- Signed engagement letter
- Completed New Client Questionnaire
- Completed Risk Tolerance Questionnaire
- Recent account statements
- New account forms
At this meeting, we ask the client several follow up questions based on his/her responses to the New Client Questionnaire, Risk Tolerance Questionnaire, and the initial meeting. At this point in the process, our objective is to gain a firm grasp of the client’s goals (short and long term), interests, family circumstances, and risk tolerance. It is important to identify the client’s risk tolerance (both ability and willingness) prior to making investment decisions, so that he/she is not exposed to unwanted portfolio risk. The Risk Tolerance Questionnaire is one of several methods used to gauge a client’s attitude toward risk. Other methods include interviews, conversations, life events, and past investment decisions.
Writing the Financial Plan
Planning is important no matter what the project; whether going on vacation or saving for retirement, a plan helps document goals and identify steps to achieve them. All the information gathered during the fact-finding meeting is combined together to prepare a financial plan. A financial plan is a comprehensive written document that integrates the client’s income, assets, and liabilities to determine the likelihood of achieving his/her goals. ACap uses robust software to prepare financial plans for clients. Plans not only help determine the probability of reaching goals, but they can also be used to answer countless “what if” questions: What if I retire earlier (or later); what if I buy a vacation house; or what if I save more (or less) during my working years. The financial plan can easily incorporate these variables, and show their results side by side for easy comparisons. Financial plans are useful tools for clients to prioritize their wants, needs, and wishes in order to successfully reach their goals. Financial plans are reviewed annually and updated as needed.
Investment Policy Statement (IPS)
While the financial plan documents client goals and the probability of success, the IPS defines the steps. The IPS is used as both a roadmap and a report card for both the client and ACap. The IPS is a customized signed document specifying a client’s return and risk objectives, any constraints imposed by the client (i.e. socially responsible investing), guidelines for how to diversify assets, monitoring frequency, and policies that govern the relationship between the client and ACap. The IPS is broken down into several sections.
- Return Objective: Identifies the objective of the portfolio. Examples include: pay for living expenses during retirement, buy a second home, retire early, etc.
- Risk Tolerance: Identifies the client’s ability and willingness to assume risk.
- Constraints: States the parameters in which the portfolio must work. The constraints section includes several subsections: Liquidity, Time Horizon, Tax, Legal/Regulatory, and Unique Circumstances.
- Asset Allocation: Defines how the portfolio will be allocated (diversified) among several asset classes in accordance with the IPS and in line with the client’s overall goals and objectives.
The IPS is a living document that is reviewed annually and updated as client circumstances change (i.e. marriage, children, inheritance, etc.).
Once the financial plan and IPS have been developed, ACap can begin implementing the IPS. This includes placing trades in the client’s accounts in accordance with the IPS. Prior to execution, all proposed trades are presented to the client; in other words, NO trades are made in any account without the knowledge of the client. Client accounts are held at Scottrade and Charles Schwab, and the client always retains control of his/her assets.
The client’s portfolio is monitored daily and reviewed quarterly using specialized portfolio management software. Portfolio values change with the passage of time, and require rebalancing to return back to the IPS allocations. (Rebalancing is the process of buying and selling portions of your portfolio in order to set the weight of each asset class back to its original state.) The client is presented with highly detailed performance reports on a quarterly basis.
Most clients find that the process of going through the steps described above gives them greater control over their financial future because they are better able to recognize and understand investment strategies.