SECTION 2

THE KNOW YOUR CLIENT

COMMUNICATION PROCESS

4 Getting to Know the Client

5 Behavioural Finance
6 Tax and Retirement Planning

© CANADIAN SECURITIES INSTITUTE

4•2 INVESTMENT FUNDS IN CANADA

SECTION 2 | THE KNOW YOUR CLIENT

COMMUNICATION PROCESS
In Section 1, we introduced you to the role of the mutual fund sales representative. This role requires that
representatives know their clients and products well enough so that recommendations can be made based on client
preferences, wants, and needs.
In Section 2, our job is to help you understand how to “know your client.” This part of the client service equation is
as important as understanding the mutual funds the client may wish to buy.
In Chapter 4, we explain what specific information must be obtained from each client before you are in a position
to make investment recommendations based on suitability. Suitability means making recommendations once
all information about a client and a security is analyzed to determine if an investment is suitable for the client’s
account. The chapter ends with a classification of clients based on the Life-Cycle Hypothesis.
In Chapter 5, we introduce behavioural finance, which is the use of psychology to understand human behavior in
finance or investing. As a mutual fund sales representative, you must be aware that clients may be making decisions
based on irrational or emotional biases and how this may affect your relationship with your clients.
In Chapter 6, we provide an overview of the tax and retirement planning options that clients have available to them.
Since accumulating wealth for retirement is a primary goal for most clients, it is important for the mutual fund sales
representative to acquire knowledge about the various programs and vehicles available to save for retirement.

© CANADIAN SECURITIES INSTITUTE

 Getting to Know the Client 4

CONTENT AREAS

Why are Client Communication and Planning Important?

What is the Financial Planning Approach?

What are the Steps in the Financial Planning Process?

What is the Life-Cycle Hypothesis?

LEARNING OBJECTIVES

1 | Describe the client communication and planning process.

2 | Summarize the six steps of the planning process and describe how to apply them to client scenarios.

3 | Describe and differentiate between the five stages of the life-cycle hypothesis.

© CANADIAN SECURITIES INSTITUTE

4•4 INVESTMENT FUNDS IN CANADA

KEY TERMS

Key terms are defined in the Glossary and appear in bold text in the chapter.

asset allocation investment knowledge

capital gains life insurance

capital growth life-cycle hypothesis

cash flow net worth

current income personal data

discretionary funds record keeping

discretionary income safety of capital

financial circumstances savings

financial goals and objectives suitability

financial planning pyramid total assets

household budget total liabilities

investment horizon

© CANADIAN SECURITIES INSTITUTE

 CHAPTER 4 | GETTING TO KNOW THE CLIENT 4•5

INTRODUCTION
One of your obligations as a mutual fund sales representative is to recommend only suitable investment products,
ensuring that any solicited or unsolicited purchases are reasonable. To do this, you need complete knowledge of the
products you offer and you must have a complete understanding of your client’s goals and investment constraints.
Without these two elements, the guidance you provide will be incomplete and may result in a dissatisfied client.
This chapter is devoted to knowing the client: learning what information to obtain and how to go about getting
that information. To start, the chapter provides an overview of your responsibilities as a mutual fund sales
representative presented within a financial planning framework. This framework gives you a structure and process
for understanding your clients well enough to formulate suitable investment recommendations.

WHY ARE CLIENT COMMUNICATION AND PLANNING IMPORTANT?

A mutual fund sales representative evaluates investment suitability usually on the basis of a client’s predetermined
financial goals and objectives. Your job is to determine which mutual funds provide an acceptable fit. For this
you need excellent communication and planning skills. You undertake financial planning as a process to better
understand how clients can attain their financial objectives. This planning is a continuous process because plans
must be revised to reflect changes in the financial and personal circumstances of the client and in the economy.
Judging whether a client’s financial goals are reasonable requires that you understand how they are set. Thus, you
must look at the client from a financial planner’s perspective even though you will not be helping the client to
set goals. You must know whether the goals are consistent with the client information you obtain. The goals also
must be consistent with what you know about the long‑ and short-term performance of mutual funds and other
securities.

EXAMPLE
A client who requires earnings of 30% a year on a mutual fund investment in order to achieve a retirement goal
will likely find that goal is unattainable. A 30% return is unrealistic, especially with the volatility markets have
experienced over the last ten years.

WHAT IS THE FINANCIAL PLANNING APPROACH?

The financial planning approach means assessing clients’ current financial and personal situation, constraints, goals
and objectives and making recommendations through a financial plan to achieve these goals and objectives. The
advisor may call on specialists in investment management, taxes, estate and financial planning and integrate the
expert analysis, findings, and recommendations into a coherent plan to meet the client’s needs. In fact, many large
financial institutions have created internal teams of these specialists to support their advisors.
Financial planning involves analysis of clients’ age, wealth, career, marital status, taxation status, estate
considerations, risk profile, investment objectives, legal concerns and other matters. Accordingly, a very
comprehensive view of present circumstances can be formed and future goals better defined. In addition, the very
discipline and self-analysis required to flesh out a plan causes clients to have a clearer understanding of themselves
and their goals, making success in achieving those objectives far more realistic and likely.
Before that plan is prepared, there are four objectives that must be considered. The plan to be created:
• Must be achievable
• Must accommodate changes in lifestyle and income level

© CANADIAN SECURITIES INSTITUTE

4•6 INVESTMENT FUNDS IN CANADA

• Should not be intimidating

• Should provide for not only the necessities but also some luxuries or rewards

Each person or family will have a unique financial plan with which to reach goals. However, there are some basic
procedures that can be followed to begin a simple financial plan. These steps are common to all.

WHAT ARE THE STEPS IN THE FINANCIAL PLANNING PROCESS?

Typically, the financial planning process can be divided into the following steps:
1. Establishing the Client-Advisor relationship
2. Collecting data and information
3. Analyzing data and information
4. Recommending strategies to meet goals
5. Implementing recommendations
6. Conducting a periodic review or follow-up

Although financial planning involves the same set of steps for each client, an effective plan is a unique and specific
plan that addresses the distinct needs of each client.

ESTABLISHING THE CLIENT-ADVISOR RELATIONSHIP

Interviewing the client provides an opportunity to determine what issues and problems the client has identified
and whether development of a financial plan will deal with them. It also helps both the advisor and the client
to determine whether they feel that a long-term relationship can exist. During the interview, the advisor should
discuss the financial planning approach and how it will help the client meet his or her objectives. The advisor should
communicate to the client that there will be choices and decisions to be made regarding alternative strategies for
dealing with planning issues. Likewise, there will be alternatives in choice of product which should be dealt with by
specialists in each area. The advisor should also disclose any areas where a conflict of interest may arise.
If the initial interview is successful from both the advisor’s and the client’s viewpoint, the advisor should formalize
the relationship with either a letter of engagement or a formal contract. This is to ensure that the client is fully
aware of exactly what services the advisor will provide and what information the advisor will require in order
to prepare a plan. The letter should also outline matters such as the method of compensation and the client’s
responsibility for the compensation of other professionals, such as lawyers and accountants.

COLLECTING DATA AND INFORMATION

An advisor contributes to a client’s well-being by understanding the difference between the client’s current status
and future requirements and goals, and by helping to resolve these differences. To do this effectively, information
must be gathered about the client. To acquire this information, an advisor has to follow intuition and instinct while
applying some sound techniques for gathering data and assessing the client’s requirements.
Advisors are required to know the essential details about each of their clients including:
• The client’s current financial and personal status
• The client’s investment goals and preferences
• The client’s risk profile

© CANADIAN SECURITIES INSTITUTE

 CHAPTER 4 | GETTING TO KNOW THE CLIENT 4•7

Successful advisors go beyond just knowing the essential details of a client’s situation. They understand the client’s
unique personal needs and goals including:
• The process the client uses to make important decisions
• The way in which the client prefers to communicate with the advisor
• The psychological profile of the client
• The needs, goals, and aspirations of the client’s family, if applicable

An advisor does far more than just manage the financial lives of clients and provide advice to help them achieve
their financial goals. Clients must also be encouraged to assess and re-examine their goals in the context of their
evolving business and personal lives. Clients’ motivations must be understood. Sometimes the advisor has to dig
deep to find them, because clients’ motivations are not always readily apparent. The advisor must work with the
clients to understand what makes them tick and how they can best build a financial strategy.
There are a number of methods to identify and define clients’ motivations for pursuing a particular financial
objective. Most of them involve actively listening to clients and interpreting their statements in the context of their
unique personality, background, character and context.
It is the advisor’s job to help the client articulate those emotions and build a financial strategy to keep them under
control.

COMMUNICATING WITH AND EDUCATING THE CLIENT

The job of gathering information about the client is really just the start of the client communication process.
This process also includes regular contact and education. Clients rely on an advisor for a number of reasons, but
almost all of them share one characteristic. They all want someone to understand and attend to the details of their
financial lives.
Clients want to know they have an advisor who is watching out for their interests, one who is thinking about them
and is prepared to take the time and effort to call them, even when the news is not favourable.
The advisor’s job will be easier if clients understand why specific decisions about the plan have been made. The
advisor can explain in simple terms the technical nature of the plan’s individual elements – “A global equity fund
invests in stocks on markets around the world”.
The greater challenge is to earn clients’ full co-operation and trust in making these decisions. In fact, without
a client’s co-operation, advisors cannot do their job. To gain this trust, advisors have to explain how specific
investments will help clients achieve their goals and what type of risks these investments carry.

OTHER INFORMATION REQUIRED

A great deal of information is necessary to prepare a plan, including:
Personal data: These include age, marital status, number of dependants, risk profile and health and employment
status. An analysis of these factors may reveal special portfolio restrictions or investment objectives and thus help
define an acceptable level of risk and appropriate investment goals.
Net worth and family budget: The advisor can obtain a precise financial profile by showing the client how to prepare
a Statement of Net Worth and a Family Budget if the client does not already have these documents available. It is
important to determine the exact composition of the client’s assets and liabilities, the amount and nature of current
income and the potential for future investable capital or savings. This information will be invaluable in determining
the amount of income a portfolio will have to generate and the level of risk that may be assumed to achieve the
client’s financial goals.

© CANADIAN SECURITIES INSTITUTE

4•8 INVESTMENT FUNDS IN CANADA

Record keeping: Part of any financial plan includes advice or perhaps instructions for the client on keeping and
maintaining adequate and complete records. It is important for family members to be aware of where records are
kept so that they can access this information in an emergency. A document should be prepared which gives the
location and details of wills, insurance policies, bank accounts, investment accounts as well as any other financial
information. There should also be a list of the professional advisors used by the client, such as the name and contact
information of any lawyers, accountants, financial planners, IAs or doctors consulted by the client.

ANALYZING DATA AND INFORMATION

Your goal must be to obtain all the information needed to determine the type of mutual funds that would be
suitable in view of the client’s objectives and constraints. In some cases, the information obtained will lead you to
suggest a revision of the client’s objectives. For example, if a client has three dependants and no cash reserve, then it
is premature to focus on long-term goals.
The KYC rule requires that the mutual fund sales representative gather the following information, at a minimum
when opening an account for a new client:
• The client’s investment needs and objectives.
• The client’s personal circumstances.
• The client’s financial circumstances, including annual income and net worth.
• The client’s investment knowledge.
• The client’s risk profile.
• The client’s investment time horizon.

Based upon the above and other information you gather, you can diligently decide on suitable mutual fund
investments. Client account documentation should reflect all material information about a client’s current status. It
should be updated regularly to reflect all material changes to the client’s status to ensure the continuing suitability
of investment recommendations.
Most mutual fund sales representatives have a standard application form their firms use to gather this information.
Most firms require the following information:
• For all clients: name, type of account, residential address and contact information, date of birth, employment
information, number of dependants, other persons with trading authorization on the account, other persons
with a financial interest in the account, investment knowledge, risk profile, investment needs and objectives,
investment time horizon, financial circumstances including income and net worth, and any other information
required by law.
• Waiver of information: If a client refuses to provide any part of the minimum information required on the
application, a waiver should be obtained from the client in written form acceptable to your dealer. Refer the
client to your dealer’s branch compliance officer or manager for assistance in these situations.

You must have a special authorization agreement signed by the client if the client intends to place orders by fax or
phone. Otherwise, orders taken over the phone may expose you to risk if a loss occurs. Today, calls from clients are
recorded to ensure that there is a verifiable record of the order and what was said between the sales representative
and the client. Dealers also record calls for quality control purposes.
Your recommendations must all be based on careful analysis of information about both the client and the
particular transaction. This duty is independent of whether a mutual fund order is solicited or unsolicited. Your
recommendations will flow directly from the client’s goals and objectives.

© CANADIAN SECURITIES INSTITUTE

 CHAPTER 4 | GETTING TO KNOW THE CLIENT 4•9

INVESTMENT NEEDS AND OBJECTIVES

Clients often state their financial goals and objectives with a particular set of targets in mind. For example:
• “I’d like to retire at 55.”
• “When I retire in 20 years, I’ll need $60,000 in annual income.”

Financial objectives are personal and depend to a large extent on the client’s tastes and preferences. For example,
some clients prefer to enjoy a more expensive current lifestyle even if that might mean a more meagre retirement.
Others prefer to save toward a comfortable retirement and are willing to accept a more frugal current lifestyle.
Clients’ individual lifestyle choices usually are not subject to debate.
Properly set objectives should be stated in clear financial terms; that is, a monetary value for a financial target
should be established for whatever goal the client has in mind. A typical target for a retirement goal states how
much pre‑tax income should be available for a given number of years following retirement.

EXAMPLE
A 30‑year‑old client wants $40,000 per year in retirement income, before taxes, with the purchasing power in
today’s dollars, for 25 years after retiring at age 65.

Precise goals—those stated with numbers—make the whole planning process more orderly and controllable. If goals
are vague, then the actions needed to attain those goals are likely to be vague as well.
Not all goals are long-term like that of a 30‑year‑old saving for retirement in 35 years. Some goals are short-term,
such as saving for a down payment on a house (3-5 years). Others are medium term, such as saving for a child’s
university education (10-15 years). However, all goals should be stated as precisely as possible.
Case Study | New Parents Teresa and Patrick: Turning Dreams into Goals
(for information purposes only)

Teresa and Patrick are meeting with Yvonne, a financial advisor at their bank. Married for two years and
with a newborn child, they are hoping to begin their investment journey and turn their financial dreams into
achievable goals.
Yvonne begins by discussing the couple’s dreams: first, they want to buy a house as soon as possible; second,
they want to start saving for their child’s education; and third, they want to begin saving for retirement as early
as possible. Yvonne helps Teresa and Patrick establish their budget and cash flow, determining that the couple has
limited resources after day-to-day expenses to save. Fortunately, a wedding present from Teresa’s parents have
given them enough for a substantial down payment towards the purchase of their first home.
Yvonne helps the couple to establish their short- (i.e. house purchase), medium- (i.e. child’s education) and long-
term (i.e. retirement) goals. She also advises them to have a “rainy day” fund for emergencies and unforeseen
expenses. Yvonne explains the benefits of opening a Registered Retirement Savings Plan (RRSP) to take advantage
of the immediate tax savings and the long-term benefit of tax-deferred compounding, while also educating them
about the Home Buyer’s Plan (a plan that allows qualified home buyers to use RRSP money to finance the down
payment on a home).
The couple agree that their first priority is to save for their home purchase, ideally within one to three years. With
Yvonne’s guidance, they decide to each establish an RRSP, depositing most of the funds from Teresa’s parents. The
remainder will be used to open a Registered Education Savings Plan (RESP) for their daughter. The couple are excited
to learn that an RESP will allow them to build tax-deferred income on contributions made to the plan for a child’s
post-secondary education. The tax refunds from the large RRSP deposit will be used to fund a Tax-Free Savings
Account (TFSA) as an emergency fund. Their excess cash flow will be split between further contributions to their
respective RRSPs and the remainder will go into the RESP (RESPs and TFSAs are covered in more detail in Chapter 6).

© CANADIAN SECURITIES INSTITUTE

4 • 10 INVESTMENT FUNDS IN CANADA

Case Study | New Parents Teresa and Patrick: Turning Dreams into Goals
(for information purposes only)

Given the short timeframe and uncertain timing for purchasing their new home, Yvonne recommends cashable
GICs to ensure that their funds are available when they need them and so that their principle is not at risk. She
recommends money market funds for their TFSA, again to ensure that the funds are available whenever they may
require them. She recommends a target-dated education fund for their child’s RESP, which will manage the risk
of the portfolio overtime, reducing the growth component as the child’s targeted post-secondary education start
date nears.
With their short- and mid-term dreams now achievable goals, Teresa and Patrick agree to revisit their long-term
retirement savings goal. They will review their savings plans and portfolios every six months to ensure that they
stay on track to realizing their dreams that have now become real goals.

Mutual fund order forms typically offer a limited number of general objectives, such as safety of capital,
maintenance of current income, capital growth (or capital gains) and tax minimization. While these are called
objectives, they really represent the types of returns the client hopes to generate from the investment:
• Safety of capital is the return generated on investments that are least likely to erode the client’s capital even
in the short-term. The only type of mutual fund with this characteristic is a money market fund. All other funds
contain some risk so that, in the short-term, capital may decline. This type of return is expected to just maintain
the client’s purchasing power. It is not expected to increase wealth. Safety of capital returns, since they come
from investments such as term deposits and money market funds, are in the form of interest income.

• Current income is earned from mortgage funds, bond funds, preferred dividend funds, and, to a certain extent,
equity funds that seek out dividend paying companies to hold in their portfolios. These fixed-income funds are
riskier than money market funds, whose goal is to preserve capital and provide modest interest income. Because
these funds are generally more volatile than money market funds, the client’s investment horizon (the length
of time the money is expected to remain invested) must be longer. Earning current income means not only
preserving purchasing power but also generating enough income so that the client can live off the proceeds of
the investment and still preserve the capital base.

• Investors seeking capital growth or capital gains must be willing to invest in the riskier types of mutual funds
that offer the possibility of capital gains. Although fixed‑income funds offer some capital gains potential, most
capital gains are offered by equity growth funds. Portfolios consist of companies that tend not to pay current
dividends but whose shares may increase in value over time. Equity growth funds can be highly volatile, so they
are suitable mainly for clients with long-term investment horizons. Over the long-term, growth funds should
increase the client’s wealth.

• When assessing the return from any investment, you must consider the effect of taxation. The tax treatment of
any investment varies depending on whether the returns are categorized as interest, dividends or capital gains.
Thus, tax treatment of the returns influences the choice among investments.

PERSONAL CIRCUMSTANCES
Personal circumstances may represent challenges or constraints to the client’s choices, including factors such as
marital status, number of dependents and age. These factors have a major impact on the client’s ability to bear risk
and the financial goals selected.

© CANADIAN SECURITIES INSTITUTE

 CHAPTER 4 | GETTING TO KNOW THE CLIENT 4 • 11

EXAMPLE
A client who is 25 years old, single and without dependents is likely to have different short‑ and medium-term
goals than a married, 40‑year‑old with two high school aged children. Changing personal circumstances might
result in the need to make adjustments to objectives. Some objectives attainable for a dual-income couple with
no children can suddenly become unattainable with the arrival of a child or the breakup of a marriage. Changing
personal circumstances make personal financial planning a dynamic process requiring the regular monitoring and
readjusting of goals.

Other problems or constraints may arise from the client’s investment knowledge, or lack of it, and the client’s risk
profile.

FINANCIAL CIRCUMSTANCES
A client’s financial circumstances are important when assessing investment suitability because it helps to
determine the amount of savings a client can commit to the purchase of mutual funds and the level of risk they can
afford. The better a client’s financial circumstances, the more risk he or she can assume and the better the returns
will be in the long run.
Financial circumstances generally improve with the size of the investment portfolio, the excess income from
employment and investment over living expenses (savings), and the stability of the clients’ employment situation.
An individual’s ability to save depends on cash flow, which is the amount of money coming in from employment
and other sources and the amount of money going out to pay bills. The difference between these two amounts
is the discretionary income available for savings. Savings is the amount of money not needed for current
expenditures.
The best way for clients to determine how much discretionary income for savings they will have is to prepare a
household budget on a monthly or yearly basis. The format of a typical budget is shown in Figure 4.1. You may
want to adopt this format when discussing budget matters with clients or in assessing your own financial situation.
Note that it has a place to enter both inflows and outflows. Key outflows include mortgage payments or rent, loan
interest and repayments, and life insurance. Life insurance is important in that it replaces lost earnings with a
lump‑sum payment should the investor die. While the need for life insurance is debatable for a young, single client,
it is practically a requirement for families with children.

© CANADIAN SECURITIES INSTITUTE

4 • 12 INVESTMENT FUNDS IN CANADA

Figure 4.1 | A Typical Household Budget

Monthly Total Monthly Total Annual
NET EARNINGS
Self $ ____________
Spouse ____________
Net Investment Income ____________ $ ____________ $ ____________
EXPENSES & SAVINGS

Maintaining Your Home

Rent or Mortgage Payments $ ____________
Property Taxes ____________
Insurance ____________
Light, Water & Heat ____________
Telephone, Cable ____________
Maintenance & Repairs ____________
Other ____________
TOTAL MONTHLY $ ____________
TOTAL ANNUAL $ ____________

Maintaining Your Family

Food $ ____________
Clothing ____________
Laundry ____________
Auto Expenses ____________
Education ____________
Child Care ____________
Medical, Dental, Drugs ____________
Accident & Sickness Insurance ____________
Other ____________
TOTAL MONTHLY $ ____________
TOTAL ANNUAL $ ____________

Maintaining Your Lifestyle

Religious, Charitable Donations $ ____________
Membership Fees ____________
Sports & Entertainment ____________
Gifts and Contributions ____________
Vacations ____________
Personal Expenses ____________
TOTAL MONTHLY $ ____________
TOTAL ANNUAL $ ____________

Maintaining Your Future

Life Insurance Premiums $ ____________
RRSP & Pension Plan Contributions ____________ $ ____________ $ ____________
TOTAL MONTHLY EXPENSES AND SAVINGS $ ____________
TOTAL ANNUAL EXPENSES AND SAVINGS $ ____________
AVAILABLE FOR INVESTMENT $ ____________ $ ____________

© CANADIAN SECURITIES INSTITUTE

 CHAPTER 4 | GETTING TO KNOW THE CLIENT 4 • 13

Whatever savings the client has accumulated to date is considered part of the client’s overall net worth. Net worth
is the difference between the client’s total assets and total liabilities, or more simply put, net worth is the amount
owned less the amount owed. Total assets include the estimated market value of real estate, plus the value of
all investments, and the value of all other assets held by the client. Total liabilities are calculated by adding up
the outstanding amount on mortgages and loans (e.g., car loan). Any unpaid bills are counted as liabilities as well
(e.g., income taxes payable).
The net worth number alone does not provide a complete indication of how much the client has accumulated
toward his or her goals. For example, fluctuating real estate values can have a dramatic effect on a client’s net worth
but little significance in terms of accumulated savings. Real estate is an illiquid asset, not readily convertible to cash,
and is subject to market fluctuations.

EXAMPLE
If a client owns a house worth $400,000 that she paid $50,000 for several years ago, then her net worth has
increased significantly. Conversely, if a client paid $400,000 for a home that is now worth $350,000 in today’s
market, then there would be a reduction in net worth.

Figure 4.2 shows a typical layout of a net worth statement.

Figure 4.2 | Statement of Net Worth

ASSETS
Readily Marketable Assets
Cash (savings accounts, chequing accounts, etc.) $ ____________
Guaranteed investment certificates and term deposits ____________
Bonds – at market value ____________
Stocks – at market value ____________
Mutual funds – at redemption value ____________
Cash surrender value of life insurance ____________
Mortgages at principal value ____________
Other ____________

Non-liquid Financial Assets

Pensions – at vested value $ ____________
RRSPs ____________
Tax shelters – at cost or estimated value ____________
Annuities ____________
Other ____________

Other Assets
Home – at market value $ ____________
Recreational properties – at market value ____________
Business interests – at market value ____________
Antiques, art, jewellery, collectibles, gold and silver ____________
Cars, boats, etc. ____________
Other real estate interests ____________
Other ____________
TOTAL ASSETS $ ____________

© CANADIAN SECURITIES INSTITUTE

4 • 14 INVESTMENT FUNDS IN CANADA

Figure 4.2 | Statement of Net Worth

LIABILITIES
Personal Debt
Mortgage on home $ ____________
Mortgage on recreational property ____________
Credit card balances ____________
Investment loans ____________
Consumer loans ____________
Other loans ____________
Other ____________

Business Debt
Investment loans $ ____________
Loans for other business-related debt ____________

Contingent Liabilities
Loan guarantees for others $ ____________
TOTAL LIABILITIES $ ____________

ASSETS $ ____________
NET WORTH Minus LIABILITIES$ ____________
NET WORTH $ ____________

Both net worth and annual income are categories usually covered in a mutual fund account application form. The
form has a number of check‑box choices that vary from institution to institution. The net worth box provides an
indication of the current status of the client’s wealth, and how far the client has come toward the ultimate wealth
accumulation goals. The annual income box indicates how attainable the goals are likely to be.
Savings represent surplus or discretionary funds (i.e., funds that are not needed for day‑to‑day living). All clients
should build up an emergency cash reserve. How much should be held will depend upon personal circumstances,
but should be in the range of three to six months of net income.
How should a mutual funds sales representative deal with clients who have little or no liquid (cash) reserve as part
of their net worth? These clients tend to have relatively lower levels of employment income. This constraint limits
their ability to generate a cash reserve for emergencies in the short term. If such clients want to invest in a mutual
fund, then you should direct them to highly liquid mutual funds (e.g., money market funds) in case they require cash
for emergencies. Other types of funds will likely have too much volatility to make them acceptable candidates for
an emergency cash reserve. This is a responsible approach to take for such clients.

INVESTMENT KNOWLEDGE
Over the course of your career, you are going to meet clients with different financial and personal circumstances,
goals and objectives, and who will have varying degrees of financial market investment knowledge. This will be one
of the most interesting, and at times challenging, parts of your role as a mutual fund sales representative.
Investment knowledge differs widely from person to person and is an important determinant of how much
investment risk a client can bear. Knowledgeable investors tend to have a better understanding of risk, as well as
their own ability to bear that risk. In addition, knowledgeable investors:
• understand the risk/return trade-off of securities and mutual funds
• know how these tradeoffs should be reflected in their investment portfolios

© CANADIAN SECURITIES INSTITUTE

 CHAPTER 4 | GETTING TO KNOW THE CLIENT 4 • 15

Experienced clients usually are easier to deal with, since they know what they want in investments and are aware of
the risks.

RISK PROFILE
A client’s risk profile requires an understanding of their willingness to accept risk (risk tolerance) and their ability
to endure a potential financial loss (risk capacity). The risk profile for a client should reflect the lower of the client’s
willingness to accept risk and their ability to endure potential financial loss.

DETERMINING AN INVESTOR’S WILLINGNESS TO ACCEPT RISK

Figuring out how a client defines risk and exactly how much risk they are willing to accept involves asking the right
types of questions during interviews and on questionnaires. Because it is hard to get a client to put their attitudes
toward risk into words, one of the primary goals of a questionnaire is to pinpoint how the client defines risk and how
much of it they are willing to accept to achieve their goals.
Questionnaires should contain, behavioural questions that seek to model actual client actions in different
circumstances, along the lines of “if this happened, what would you do?” Typically, the answers to risk-based
questions allow the assignment of different degrees of willingness to accept risk.
Once a client has completed an investor questionnaire, the answers can be used to determine the client’s
willingness to accept risk, usually by applying a scoring system. A point value is assigned to each potential answer.
No single question can determine a client’s willingness to accept risk, as clients respond differently to different
situations. However, with the completed questionnaire, a mutual fund representative can determine a client’s
overall willingness to accept risk by adding up the points for each response and placing the client into a risk
tolerance category according to the questionnaire answer key.

DETERMINING AN INVESTOR’S ABILITY TO ENDURE POTENTIAL FINANCIAL LOSS

Assessing a client’s capacity for loss involves the representative having an understanding of other factors such as
the client’s financial circumstances, including liquidity needs, debts, income, and assets. Another consideration in
determining risk capacity is how much of a client’s total investments an account or a particular securities position
represents. Age and life stage can also be important considerations when assessing a client’s ability to endure
potential financial loss.
Once these elements have been determined, a client’s ability to endure potential financial loss can be fine-tuned
by finding out how important their goals are and how serious the consequences will be if one or more of them
are not met. If all of the goals are very important to the client, and they believe the repercussions of not meeting
the goals will be severe, then the client’s ability to endure potential financial loss is lower. On the other hand, if
the consequences of not meeting one or a few of the goals are not serious, the client’s ability to endure potential
financial loss is higher.

ESTABLISHING A RISK PROFILE

A client’s risk profile represents the combination of their willingness to accept risk and their ability to endure
potential financial loss. As noted earlier, according to NI 31-103, a client’s risk profile should reflect the lower of
their willingness to accept risk and their ability to endure potential financial loss.
If both willingness to accept risk and ability to endure potential financial loss are low, then the client’s risk profile is
low. If both aspects are high, then the client’s risk profile is high.
A client’s expectations for returns in line with their investment needs and objectives may conflict with the level of
risk they are willing and able to accept. A desire to meet unrealistic expectations may lead such clients to ask the
representative to invest in higher-risk products that are unsuitable for them. A detailed discussion of the relationship
between risk and return may be necessary to reconcile such conflicts and establish more realistic expectations.

© CANADIAN SECURITIES INSTITUTE

4 • 16 INVESTMENT FUNDS IN CANADA

A representative should not override the risk a client is willing and able to accept on the basis that the client’s
expectations for returns cannot otherwise be met given the risk profile associated with their KYC responses. The
representative should identify any mismatches between the client’s investment needs and objectives, risk tolerance,
and capacity for loss. The questions at the source of this conflict should be revisited with the client. If the client’s
goals or return objectives cannot be achieved without taking greater risk than they are able or willing to accept,
alternatives should be clearly explained, such as saving more, spending less, or retiring later.
Sometimes, after discussion, it is determined that the client does not have the capacity or tolerance to sustain the
potential losses and volatility associated with a higher-risk portfolio. In such cases, the advisor should explain to the
client that their need or expectation for a higher return cannot realistically be met, and, therefore, the higher-risk
portfolio is unsuitable. The interaction with the client and the resulting decisions should be properly documented.

DID YOU KNOW?

The Mutual Fund Dealers Association provides a sample investor questionnaire that, in part,
demonstrates how to establish a client’s risk tolerance and risk capacity. For more, please navigate to
www.mfda.ca and use the search box to locate the sample investor questionnaire.

INVESTMENT KNOWLEDGE
Over the course of your career, you are likely to encounter clients with varying degrees of investment knowledge.
Some clients may have never invested before, while others may be highly experienced sophisticated investors.
Investment knowledge differs widely from person to person and is an important determinant of how much
investment risk a client can bear. Knowledgeable investors tend to have a better understanding of risk, as well as
their own ability to bear that risk.

SUITABILITY OF INVESTMENTS
Once you have all of the needed client information, you can begin determining the suitability of various
investments. If the client already has an investment portfolio, then you can evaluate if the fit is appropriate. If the
client does not have an investment portfolio, then you can help him to decide on an appropriate asset allocation or
mix of investments among cash, fixed-income securities, and equities.
Setting personal financial goals and objectives is a difficult task. Your client must objectively assess personal
strengths and weaknesses as well as realistically review career potential and earnings potential. Some may consider
this in-depth review to be tedious and perhaps unnecessary, but it is not possible to set realistic financial goals
without considering how to reach that goal. While many clients dream of striking it rich in the financial markets,
those who actually reach that goal have done so by design, not by chance.
Since mutual funds are selected to suit individual needs, it is essential to develop a clear client profile. Only by
studying all factors that potentially affect a client can suitable recommendations be made or an individual’s
investment strategy be designed.

RECOMMENDING STRATEGIES TO MEET GOALS

After collecting and analyzing the information, a plan of action must be developed for the client to follow. This
plan of action may require the input of other professionals. If this is the case, the advisor should prepare a list of
instructions for these professionals as well. Clearly defined goals and tasks, as well as a schedule for achievement
can be of enormous benefit to the client. The financial plan should be simple, easy to implement and easy to
maintain.
It is important to implement a financial plan in a timely manner. Once the preparatory work of collecting, analyzing,
determining and calculating is finished, it is up to the client to decide to put all the carefully thought-out ideas and
strategies in motion.

© CANADIAN SECURITIES INSTITUTE

 CHAPTER 4 | GETTING TO KNOW THE CLIENT 4 • 17

At this point the client should review the plan, the goals, the objectives and the risk profile. The client should be in
agreement with them before any potential solutions are implemented. The investment advisor must ensure that the
client understands each product chosen and is aware of the potential risks as well as the potential rewards.

IMPLEMENTING RECOMMENDATIONS
At this stage, the advisor may help clients implement the recommendations. Some recommendations may be
immediate, such as applying for insurance or paying down debt. Other recommendations will be implemented over
a longer term, such as making periodic investments, contributing funds to an RRSP, etc.
If necessary, the advisor may refer clients to a business partner such as a lawyer, tax adviser, investment adviser, real
estate broker, retirement specialist or insurance representative.

CONDUCTING A PERIODIC REVIEW OR FOLLOW-UP

The last step in this whole process is the review. A financial plan should never remain static. Just as investments
rise and fall in market value, a person’s financial situation can change. As well, economic changes, tax increases
and health issues all can threaten even the “best-laid plans.” While there is no set time frame for such a review,
an annual review is the minimum required. Mini reviews may be necessary depending on the circumstances (i.e.,
changing tax, economic or employment status). In extreme circumstances, such as a job loss, it may be necessary to
devise a completely new financial plan.
Revisions can include reviewing a will, changing beneficiaries and ensuring that the client is continuing to take
advantage of all tax savings techniques. Recommendations can be simple – no changes are necessary – or
could entail a great number of changes. It is important that the advisor follow up with the client to ensure that
suggestions are carried out.
This overview of the financial planning process provides the client with the structure of a basic financial plan but
does not deal with specialized issues such as trusts, estate freezes, the need for insurance, etc. To complete a
thorough analysis of investment needs and requirements, these areas must be addressed as well; however, it is
beyond the scope of this text to do so. A more thorough discussion of these topics is provided in more advanced
courses offered by CSI.

GATHERING INFORMATION

How do you gather information and assess client needs to prepare a financial plan? Complete the online
learning activity to assess your knowledge.

WHAT IS THE LIFE-CYCLE HYPOTHESIS?

To add perspective to getting to know a client, it can be helpful to think in terms of a client’s typical investing life
cycle. The basic idea behind the life-cycle hypothesis is that as people age, their objectives, financial and personal
circumstances, investment knowledge, and risk profile change as well. When dealing with clients, you can make the
general assumptions that:
• Older clients tend to be more risk averse than younger clients.
• Younger clients tend to focus on shorter term financial goals — such as saving for major purchases, such as a
home.
• Older clients tend to focus more on retirement and estate‑building.

© CANADIAN SECURITIES INSTITUTE

4 • 18 INVESTMENT FUNDS IN CANADA

The life-cycle hypothesis, developed during the 1950s by several North American and European economists, has
great potential benefit to a mutual fund professional. It suggests that if you know the age of your client, then you
can infer a number of investor characteristics, such as goals, circumstances and risk profile. Certainly, if the life-cycle
hypothesis is valid, it should make “knowing your client” an easier task.
The good news is that the life‑cycle hypothesis works for many clients. The bad news is that it does not work for
all of them. In getting to know a particular client, a good strategy is to assume that the life‑cycle hypothesis holds.
However, you must be sensitive to the fact that you may have to change your mind as you obtain more information
about a particular client. Special circumstances require an individualized approach.

THE STAGES IN THE LIFE-CYCLE

There are five stages in the life-cycle:
1. Early earning years – to age 30
2. Family commitment years – 25 to 35
3. Mature earning years – 30 to 50
4. Nearing retirement – 45 to 65
5. Retired – 50 and onwards

In general, each stage corresponds to an age grouping. As you can see, the age of a client does not unambiguously
indicate a position in the life cycle. There is a considerable amount of overlap to account for the fact that every
client is unique. For example, a 30-year-old client could be in any one of the first three stages. You will need
additional information about this client to pin down the stage.

STAGE 1: THE EARLY EARNING YEARS – TO AGE 30

The early earning years generally start when an individual begins to work and ends when family commitments or
other commitments start to impose financial demands. Stage 1 investors, in general, are free of the family and
financial commitments of the next stage. They are interested in saving, but their goals are usually short term. Car
purchases and vacations are two typical goals. These clients tend not to have life insurance and probably do not
need it, since no one else depends on the continuity of their earnings.
By age 30, if a client has not yet begun a family, it is likely that they nevertheless have made some of the same
major financial commitments that their married counterparts have made, such as buying a house. It is possible,
however, that even after the age of 30, some people would still be considered Stage 1 investors.
Because these investors are young, often they are psychologically prepared to tolerate a substantial amount of
investment risk. This might lead them to invest in riskier types of assets with volatility characteristics more suitable
for investors with longer investment time horizons. Certainly, if Stage 1 clients decide to invest for the long term,
they will likely allocate their investments to riskier assets.
The action of allocating assets into investments that have different levels of risk is called “asset allocation” and will
be discussed in detail later in this course. A typical asset allocation for long-term goals might be 80% equity funds,
10% bond funds and 10% money market funds.

EXAMPLE
Henry is 28 and graduated from college a few years ago with a degree in broadcasting. He rents an apartment in
the city and is saving for a down payment on a house. He recently bought a used car that required a small bank
loan. Although he has only a small amount to invest, most of his money is held in two equity mutual funds and
two conservative funds.

© CANADIAN SECURITIES INSTITUTE

 CHAPTER 4 | GETTING TO KNOW THE CLIENT 4 • 19

How he invested his money—80% in equity funds; 10% in a bond fund; 10% in a money market fund—reflects the
higher risk profile of a typical Stage 1 investor.

STAGE 2: THE FAMILY COMMITMENT YEARS – 25 TO 35

The difference between people at Stage 2 and those at Stage 1 is the level of commitments and responsibilities
that have to be assumed. A typical Stage 2 client is fairly young and married with children. Marriage itself does not
necessarily result in a change of stage, especially if a couple does not plan to have children or buy a home. In most
cases, however, marriage will result in a shift in financial goals.
There is little doubt that the arrival of a child has a major impact on goals and the ability to attain them. It might
become more difficult to save because of the added expenses. Also, saving for post‑secondary education is likely to
become an important goal.
One of the distinguishing characteristics of Stage 2 clients is their lack of liquidity. They generally have mortgage
and car payments. Many dual-income couples see their disposable incomes decline with the arrival of children
because of substantial daycare costs or, in some cases, the complete or partial elimination of one salary. Life
insurance becomes a requirement rather than a discretionary expenditure.
The lack of liquidity has a significant impact on the savings pattern of Stage 2 clients. First, although they might
identify long-term goals, such as retirement saving, they can barely manage to save enough for more pressing
short-term goals. This is particularly true for younger Stage 2 clients. As salaries increase with job experience, more
savings can be deployed into medium-term goals such as the children’s education. It is typically difficult for Stage 2
clients to save for the long term.

EXAMPLE
Isabelle recently married Marcus, her partner of four years. In their early thirties, they have good careers and this
makes their mortgage and car payments each month quite manageable. They have also shown good discipline
in setting up automatic savings plans each month. They consider themselves long term investors and so far have
invested primarily in domestic and foreign equity funds. Upcoming life challenges: Isabelle and Marcus would like
to start a family in the next couple of years and are starting to consider how this may impact their investment
decisions.

The asset allocation for this stage reflects the nature of investment goals as well as a changing ability to bear risk
psychologically. A client who was highly risk tolerant when single is likely to be less risk-tolerant when married
with children. If a client had an allocation of 80% equity funds, 10% bond funds and 10% money market funds
when in Stage 1, that allocation might shift to reflect both the shorter investment time horizons of the new goals
as well as a greater degree of risk aversion. A new allocation might be 50% equity funds, 20% bond funds and 30%
money market funds. The move from the riskier asset allocation to the new, more conservative, one would likely be
accomplished gradually. This means that most of the new investments for a Stage 2 client will be in the lower-risk
fund categories.

STAGE 3: THE MATURE EARNING YEARS – 30 TO 50

It is difficult to say exactly when Stage 3 takes over from Stage 2. For some clients, the transition will occur early.
For others, it will occur far later in life. The critical factor determining the transition is almost certainly the family’s
level of disposable income. A two professional income family will have a short Stage 2. A single blue-collar income
family might never leave Stage 2.
Stage 3 clients may be able to save for all of the goals they have identified. In many cases, they have already made
provision for both short- and medium-term goals and they focus their attention primarily on retirement savings.
They are probably not much more risk averse than they were in Stage 2.

© CANADIAN SECURITIES INSTITUTE

4 • 20 INVESTMENT FUNDS IN CANADA

The asset allocation for Stage 3 clients is likely to shift back toward a higher weighting for equity funds. The first
reason for this shift in comparison to Stage 2 is the longer investment time horizon for retirement saving. A second
reason for the shift to equities is the result of a need to minimize taxes. These clients are often in the highest
marginal tax bracket. Investments in bond and money market funds will generate interest income that is fully taxed.
Equity funds, on the other hand, generate returns in the form of dividends and capital gains, both of which are taxed
at lower rates than interest income.
The asset allocation for Stage 3 clients will depend on the range of investment goals identified.

EXAMPLE
Sophia and Hank are in their late 40s and have two children in their early teens. Hank was recently promoted to
a senior position at his company and Sophia’s consulting business is thriving. Although these changes allow them
to save more of their earnings, the challenges they face include savings for their children’s education and shifting
some of their saving focus to their own retirement planning. How they are planning to allocate their investments:
40% equity growth funds, 30% equity funds, 20% bond funds, and 10% in money market funds.

It is worth repeating, however, that the goals of Stage 3 clients will determine the asset allocation. That allocation
can be very different, therefore, from client to client.

STAGE 4: NEARING RETIREMENT – 45 TO 65

There are two key differences between clients in Stage 4 and Stage 3. First, Stage 4 clients have fewer family
commitments. Children may already have left home to go to school or are married. Second, Stage 4 clients have
come to the realization that in a few years they will have to rely on their savings in order to maintain their standard
of living. This tends to make them more risk averse than investors in Stage 3. Clients in this stage are generally in
their peak earning years.

EXAMPLE
Nigel and Grace are in their early 50s and are empty nesters. Their son lives on his own and has a career of his
own. Nigel runs his own home-based business while Grace works in health care. Although they saved regularly,
Nigel admits that saving for retirement was not a priority; paying their mortgage and putting their son through
school took priority. Challenges: Nigel and Grace want to begin to save aggressively for retirement so that they
can maintain the lifestyle they are comfortable living.

As a result of these changes, Stage 4 clients are likely to still want tax minimization, but they might shift their
portfolios away from equity growth funds while maintaining a substantial equity component. However, their
growing risk aversion will tend to make this equity component shrink as time goes on.

STAGE 5: RETIRED
Retired clients are faced with a conflict. On the one hand, they rely on their retirement savings to maintain a certain
standard of living. On the other hand, they need to keep their remaining funds invested in order to generate a good
enough return on which to live. The problem is that better returns can be earned only with riskier investments, but
these investors cannot readily accept a high level of risk with retirement savings. In addition, they are less able to
bear risk psychologically.
Stage 5 clients also have another possible concern not shared with those in Stage 4: if they have sufficient
retirement savings, they also tend to focus on estate building and wealth transfer. They want to leave something for
children and grandchildren.

© CANADIAN SECURITIES INSTITUTE

 CHAPTER 4 | GETTING TO KNOW THE CLIENT 4 • 21

The asset allocation for retirees will most likely shift toward less risk. Therefore, the equity component will decline
in favour of less volatile fixed income and safety investments.

EXAMPLE
Marge and Vince retired several years ago after working for over 40 years. Although comfortable with their level
of retirement income, they watch their money very closely. After retiring, Vince shifted most of the couple’s
mutual fund investments to money market funds. However, he did keep about 10% of their investments in equity
funds. Challenges: Maintaining their lifestyle is a key priority. They have also promised to help fund the education
costs for their four grandchildren.

SUMMARIZING THE LIFE CYCLE

You can summarize the features of the life-cycle hypothesis by looking at how investment goals, personal
circumstances, financial circumstances, investment knowledge and risk profile change as people age. Table 4.1
summarizes these factors.
Table 4.1 | Implications of the Life-Cycle Hypothesis

Investment Personal Financial

Goals Circumstances Circumstances
Stage 1 Generally short term but Generally light. Small investment portfolios, but
Early earning could also have a longer- growing, financial commitments,
years – to age 30 term component. such as car payments.

Stage 2 Shorter term with a Become heavier. Financial burdens, such as mortgage
Family medium-term component. payments, childcare expenses,
commitment increase. They tend to have little
years – 25 to 35 liquidity.

Stage 3 Medium term with a These commitments Circumstances have greatly improved.
Mature earning substantial long-term have moderated to a It is during this stage that most of the
years – 30 to 50 component. certain extent. increase in a client’s wealth will occur.
More attention must be devoted
at that point to attaining an asset
allocation in keeping with the client’s
risk profile.

Stage 4 With retirement Family commitments Clients have substantial investment

Nearing approaching, goals tend to are once again light. portfolios with little in the way of
retirement – shift to the medium term. day‑to‑day liquidity requirements.
45 to 65

Stage 5 Goals are medium term in Could see an increase Retired clients’ financial commitments
Retired – the sense that the existing in family commitments are light and their portfolios must be
50 and onwards investment portfolio must to help grandchildren. able to maintain living standards.
continue to earn income
over the medium term.

© CANADIAN SECURITIES INSTITUTE

4 • 22 INVESTMENT FUNDS IN CANADA

The table does not include columns for investment knowledge or risk profile, because changes in both can apply
across the entire life cycle:
• Investment knowledge is likely to increase as the client ages. However, some Stage 1 investors have formal
training in finance, and many Stage 3 clients have never invested in anything other than bank deposits.
• Risk profile also changes with age. Young people are more psychologically able to bear risk. This willingness to
bear risk probably declines with age.

Asset allocations vary with each changing stage and are affected by all the constraints indicated above. However,
it is important to note that the single most important determinant of clients’ asset allocations at any stage is their
psychological willingness to bear risk. Some retirees have a very high tolerance for risk, and some 25‑year‑olds do
not. As a result, some retirees have investment portfolios containing a substantial equity fund component, while
some much younger investors refuse to invest in anything other than money market funds or GICs.
Explanatory models can be useful because they extract the key features of a complicated concept and make it easier
to understand. However, no model can be applicable in every case. In most cases, when you know some key basic
personal data about a client and estimate the client’s life‑cycle stage, you will be exactly right. However, in some
other cases, you will obtain personal data and find that the client does not fit smoothly into any of the defined
life‑cycle stages. In these cases, it is important not to force people into a particular stage. You should use the
life‑cycle hypothesis as a broad tool to help you understand a client’s overall needs.

LIFE CYCLE HYPOTHESIS

What are the characteristics of the various life stages according to the life cycle hypothesis? Complete
the online learning activity to assess your knowledge.

THE PLANNING PYRAMID

Your understanding of the financial planning approach to managing a person’s wealth benefits both you and
your clients. Financial planning involves an analysis of the client’s age, wealth, career, marital status, taxation,
estate considerations, risk profile, investment objectives, and legal and other matters. This information provides
a comprehensive view of the client’s circumstances and future goals. In addition, the discipline and self-analysis
required to create a personal financial plan helps the client to better understand his or her goals, improving the
chances of achieving them.
The financial planner puts together the plan, coordinating the advice solicited from other experts in various fields.
You may be one of those experts. That is, your role as a mutual fund sales representative could be one part of the
overall plan for a client through the advice you provide on mutual fund investments. You must restrict yourself to
giving advice only for the services you are licensed to provide or in which you are an expert. For example, you should
not give advice on the legal aspects of an estate plan; a lawyer is best suited to do that and to draft documents such
as wills.

© CANADIAN SECURITIES INSTITUTE

 CHAPTER 4 | GETTING TO KNOW THE CLIENT 4 • 23

Exhibit 4.1 | The Financial Planning Pyramid

One other tool to help the client and advisor to both clarify the client’s current situation and identify planning
needs is the financial planning pyramid. Although the financial planning pyramid may appear simplistic, it often
helps for the advisor to use visual aids in dealing with clients. The financial planning pyramid helps the advisor and
the client alike visualize goals and objectives and review investment strategy.

Art
IPOs Very Aggressive
OTC Securities
Real Estate
Precious Metals

Investment Tax Shelters

Aggressive
Commodities – Derivatives

Stocks
Mutual Funds
Moderate

Fixed-Income Securities
e.g., Bonds – Debentures – Preferred Shares GICs – Conservative
Certain Mutual Funds

Debt Elimination
Independence House – RRSP – Emergency Fund

Security Insurance – Will

If the client is interested in precious metals for example, but lacks a Will and the proper insurance coverage, it is
obvious that, by starting at the top with precious metals, the groundwork has not been done and the plan will
be unstable. The client must have a good strong base from which to work to successfully reach the goals and
objectives set.

Case Study | Winston’s Pyramid: A Wealth of Choices (for information purposes only)

Financial advisor Paul is meeting with his wealthiest client, Winston, who has contacted Paul for advice on investing
a large sum of money. Winston, 60 years old, is a successful business owner who was widowed two-years ago.
He has three children, now all adult-aged and self-sufficient. He has excellent cash flow from his business and
investments. His home, cottage and Florida condominium are all paid for. He has no personal debt.
Through the years, Paul helped Winston and his wife build up their wealth, at first helping them maximize their
savings through RRSPs for their retirement and RESPs for their children’s education. Eventually, through Winston’s
business success, they were able to grow their personal real estate holdings while over time paying off all associated
mortgage debt.
Paul has helped Winston grow his portfolio over the years through the use of ever-more sophisticated investments,
including stocks, bonds and commodities. As his taxable income has risen, Paul has helped Winston establish
investment tax shelters and used tax-effective investments, like corporate class funds, to reduce his tax bite.
Today, with more funds to invest, Paul refers to the Financial Planning Pyramid to assist in determining the best
investment options for the new funds. With such a secure financial situation, Winston can afford to be very
aggressive with his investment choices, taking advantage of the unique tax and return opportunities of the top level
of the pyramid.

© CANADIAN SECURITIES INSTITUTE

4 • 24 INVESTMENT FUNDS IN CANADA

Case Study | Winston’s Pyramid: A Wealth of Choices (for information purposes only)

Referring to the pyramid, Winston has no desire to invest in IPOs, over-the-counter (OTC) securities or precious
metals directly, even though his financial circumstances would allow him to do so. So, with estate planning in mind,
Paul recommends that Winston consider establishing a real estate investment portfolio to produce rental income
and achieve long-term capital appreciation. He suggests Winston consider purchasing a rent-producing property for
each of his children, owning them jointly. With their tax advantages and potential price appreciation, a long-term
investor like Winston can easily deal with the ups and downs of the real estate market. He can pass along the capital
appreciation of the properties to his children while providing them with additional cash flow today.

FINANCIAL PLANNING PYRAMID

Can you visualize the goals and objectives of the financial planning pyramid? Complete the online
learning activity to assess your knowledge.

© CANADIAN SECURITIES INSTITUTE

 CHAPTER 4 | GETTING TO KNOW THE CLIENT 4 • 25

SUMMARY
After reading this chapter, you should be able to:
1. Describe the client communication and planning process.
A mutual fund sales representative evaluates investment suitability usually on the basis of a client’s
predetermined financial goals and objectives.
Client information provides you with a comprehensive view of client circumstances and future goals.
One tool to help clarify a client’s current situation and identify planning needs is the financial planning
pyramid.

2. Summarize the six steps of the planning process, and describe how to apply them to client scenarios.
Gathering information properly fulfills legal requirements and allows an advisor to plan effectively for the
client.
The six steps in the financial planning process are:
– Establishing the Client-Advisor relationship
– Collecting data and information
– Analyzing data and information
– Recommending strategies to meet goals
– Implementing recommendations
– Conducting a periodic review or follow-up

3. Describe and differentiate between the five stages of the life-cycle hypothesis.
The basic idea behind the life-cycle hypothesis is that as people age, their objectives, financial and personal
circumstances, investment knowledge, and risk profile change as well.
The life-cycle suggests that if you know the age of your client, then you can infer a number of characteristics,
such as goals, circumstances and risk profile. If valid the life-cycle hypothesis makes knowing your client an
easier task.
The early earning years in Stage 1 generally start when an individual begins to work and ends when family
commitments or other financial commitments start to impose demands.
During the family commitment years in Stage 2, personal commitments and responsibilities generally
increase as family dynamics change; for example, having children and buying a home. Lack of liquidity has a
significant impact on clients in this stage.
The critical factor determining the transition from Stage 2 to Stage 3 is almost certainly the family’s level of
disposable income. Stage 3 clients may be able to save for all of the goals they have identified.
Stage 4 clients have fewer family commitments. Stage 4 clients have also come to the realization that in a
few years they will have to rely on their savings in order to maintain their standard of living. Clients in this
stage are generally in their peak earning years.
Stage 5 clients in retirement are generally faced with a conflict. On the one hand, they rely on their
retirement savings to maintain a certain standard of living. On the other hand, they need to keep their
remaining funds invested in order to generate a good enough return on which to live.

© CANADIAN SECURITIES INSTITUTE

4 • 26 INVESTMENT FUNDS IN CANADA

REVIEW QUESTIONS

Now that you have completed this chapter, you should be ready to answer the Chapter 4 Review
Questions.

FREQUENTLY ASKED QUESTIONS

If you have any questions about this chapter, you may find answers in the online Chapter 4 FAQs.

© CANADIAN SECURITIES INSTITUTE