Two clients can own identical portfolios and need opposite recommendations. The difference may be next month's payroll, a beneficiary's income, or a household's ability to withstand losses.
Client data gathering starts by establishing whose money you are managing, who may give instructions, and what the money must accomplish. Client profiling means collecting and evaluating information that connects recommendations to the client's circumstances.
Use questionnaires to organize client data gathering, interviews to clarify answers, and relevant records to support them. Document client identity, financial circumstances, objectives, investment experience, and nonfinancial considerations. Account statements, tax returns, budgets, and governing documents help reveal missing information.
Resolve material inconsistencies before relying on a profile. Someone reporting aggressive risk tolerance while needing every invested dollar for next year's tuition needs further inquiry. A completed questionnaire does not resolve that conflict.
Client identification includes essential customer facts and the authority of people acting for customers. Without them, someone lacking authority could direct the account, and the firm could not service it properly.
Common mistakes
- Treating $450,000 of net worth as spendable cash ignores assets locked in a home or retirement account.
- Calling a one-member LLC a sole proprietorship confuses disregarded tax treatment with separate legal identity.
- Assuming a limited partner loses protection after any management participation skips the governing state law.
Bottom line
- Legal form, tax classification, and trading authority require separate checks.
- Trust recommendations account for distribution requirements and differing beneficiary interests.
- The foundation calculation starts with 5% of noncharitable-use assets less related acquisition debt, subject to statutory adjustments.
- Net worth equals assets minus liabilities and does not establish liquidity.
Exam shortcut
Start by identifying whose money is involved and who may direct it. An owner's signature may not answer an entity-authority question. Mark payment deadlines before examining return choices. Tuition, payroll, estate expenses, and required distributions signal cash needs. When wealth and risk appetite appear together, look for the missing constraint: debt, unstable income, concentration, or a near-term withdrawal. For entity questions, sort each answer into liability, taxation, or management.
The full lesson (about 3,020 words, 20 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- C10
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