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Sometimes, clients take the Alice-in-Wonderland approach to investing, not realizing they can’t ask which way to go before knowing the destination.

So help a client head in the right direction.

  1. Don’t get too detailed

    The financial plan should already account for the estate, potential heirs, and the client’s goals for both. That lets you allocate assets to produce the necessary returns.

    But don’t project outcomes down to the decimal. Such detail is not only unnecessary, it can provide a false sense of security, says Beth Hamilton-Keen, CFA, director of private client portfolio management at Mawer Investment Management in Calgary. She likens it to a weather forecaster telling you there’s a 96% chance of sunshine. You wouldn’t think of bringing an umbrella.

    Instead, focus on other areas like bequests and tax strategies, where you can make stronger predictions.

  2. Review regularly

    Changing circumstances—a death, marriage or a new job—affect planning, so be flexible. “Every time I give clients a financial plan, I scrawl ‘draft’ on it because we know the recommendations and projections will need adjustments,” says Stan Tepner, an advisor at CIBC Wood Gundy in Toronto.

    When a 79-year-old client’s wife died, it triggered questions: How will his living situation change? What happens to his taxable income now that he can’t income-split? How should his will and powers of attorney change? The plan had to be restructured.

  3. Build a long-term plan

    Hamilton-Keen will make slight portfolio adjustments to take advantage of certain market opportunities. But if you’re constantly tinkering with your asset mix in response to market changes, you didn’t build it properly in the first place.

    For instance, it’s short-sighted to react to the European debt crisis by reducing exposure to European stocks in your portfolio, she says. There are many good companies on the continent, such as Unilever, a British-Dutch firm that’s a diversified business with strong consumer brands globally.

  4. Know when to drill down

    Don’t just pay attention to returns, goals and risk levels. Figure out how those considerations tie into the client’s entire plan, says Tepner. For instance, he had clients in their 80s who sold a house for $500,000. They already had another property, and were living off their RRIF and pension incomes.

    This couple wanted to invest the $500,000 to generate another $1,000 a month. Here’s where Tepner, a CA, went deeper.

    The cautious couple wanted to invest in a bond-oriented portfolio they would own jointly. But such a move would create significant taxes.

    Learning that the husband had a huge capital loss carry-forward from some bad investments, Tepner arranged for the wife to loan her husband $250,000 at the prescribed rate of 1%.

    Then, they invested most of the husband’s money and the wife’s loan in fixed-income funds that converted interest income into capital gains. The husband’s capital loss carry-forwards then eliminated the taxes on the investment earnings from these funds.

Stuart Foxman is a Toronto-based financial writer.

Originally published in Advisor's Edge