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FPSU
®
Study Guide
Chapter 1: Financial Planning Process
To be used in conjunction with the money back guaranteed
Online FPSU
®
Exam Preparation Tools
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SeeWhy Financial Learning
9
6.
Primary and Secondary Objectives
The following changes could trigger a change in primary and secondary objectives:
•
Birth of children
•
Marriage / Divorce
•
Death of a spouse
•
Change in employment
•
Moving from one life cycle stage to another
•
Attitude toward different investments and the market itself
Determining the Client's Tolerance for Risk
Understanding a client’s attitude towards risk is complicated but vital if you are to decide
what combination of risk and return is acceptable to them.
•
Client’s often view risk as the actual loss suffered and not the uncertainty before
the loss.
•
Financial institutions often view volatility as risk. For example, even if a positive
return is achieved there still may have been “risk” associated with the investment.
•
Establishing a client’s tolerance for risk requires an understanding of the
relationship of risk and return. The more risk assumed generally means the greater
the potential return. For example, a treasury bill carries very little risk but will also
generate a low return. On the other hand, a risky stock could result in a loss but
also a much greater potential return than would a treasury bill.
•
Bernartzi and Thaler based their work on two behavioural concepts called the
“
prospect theory
” and “
myopic loss aversion
”.
•
The
prospect theory
assumes that clients are twice as sensitive to losses than to
gains. In other words, a client will get much more upset about a loss than they
would be excited by a gain.
•
Myopic loss aversion
refers to client behaviour where the client has a long
investment horizon, but acts as if he has a much shorter one. For instance, a client
saving for retirement twenty years away being overly concerned about short-term
performance.