Morningstar Advisor - Summer 2007 - 21

No Two Clients Are Alike The key to recommending suitable investments is knowing each client’s profile. by Joel P. Bruckenstein While most financial service firms are structured to profit from their handling of client accounts, in the end, clients should come first. This is the basic premise behind investor suitability. Clients should be making investment decisions that match advice with their risk tolerance and investment goals. The dark side of suitability is highlighted in recent regulatory crackdowns of broker-dealers acting in their own interest rather than their clients’. Or perhaps advisors simply didn’t fully understand the investment they were recommending. Today’s products, especially variable annuities, are increasingly difficult for even a seasoned professional to understand. And keeping up with regulatory changes is a full-time job, not relegated just to a firm’s registered principal or compliance department. A further complication is that there is no one-size-fits-all suitability solution. Every recommendation an advisor makes must be tailored to each client’s unique profile. So what is an advisor to do? An important step is the creation of an investment policy statement (IPS) that the client signs. An IPS explains the relationship between the advisor and client. It should include the client’s goals, investment procedures, and the responsibilities of both the advisor and client. “The preparation and maintenance of each client’s IPS is one of the most critical functions performed by the investment advisor,” says Don Trone, founder of Fiduciary 360, a fiduciary organization for advisors in Sewickley, Pa. An IPS plays a vital role in helping the advisor understand the client and in building a trusting relationship. It’s a chance for advisors to ensure that their perception of a client’s profile matches the client’s perception. “An investment policy statement does not guarantee that what is written down is suitable, but it does give the client the opportunity to read and understand what is being done on his behalf,” says San Francisco planner Norm Boone, CFP. But compliance attorney Thomas Giachetti, chair of the Securities Group at Stark & Stark in Lawrenceville, N.J., urges caution. “Too many advisors make IPS errors that can expose them to liability,” Giachetti says. “Make no mistake; an advisor will have to defend both the IPS and the actions taken under the IPS if sued.” Both Giachetti and Trone say the challenge is keeping it simple. The IPS must be understandable to the client, yet it needs to be flexible enough for the advisor to deal with changing market conditions. “The investment guidelines have to be specific to establish the parameters of the investment process, yet provide enough latitude so as not to create an oversight burden,” Trone says. Amy Ost, CFP, a Morningstar product development manager, says she has seen in an increase in demand from advisors for Webbased tools that create customized IPSs. Morningstar Advisor Workstation offers such a tool. So does Boone’s firm, IPS AdvisorPro. Once you create an IPS, treat it as a “living” document. “Some advisors create these documents and forget about them,” Giachetti says. “That can lead to enhanced liability.” K Joel P. Bruckenstein, CFP, is publisher of Virtual Office News and contributes to MorningstarAdvisor.com MorningstarAdvisor.com 21
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Morningstar Advisor - Summer 2007

Table of Contents for the Digital Edition of Morningstar Advisor - Summer 2007

Morningstar Advisor - Summer 2007
Contents
Letter from the Publisher
Get to Know the Bond “All-Stars”
Research Briefs
Our Stewardship Test Gets Tougher
Save It for Later
Too Many Oranges
Best of Both Worlds
No Two Clients Are Alike
When It Comes to VAs, It’s Seller Beware
Hands On: Finding the Suitable Fund Share Class for Your Client
Fund Style Can Drift Off Course
Sticking to Their Style, Through Thick and Thin
Marathon Man
Growth, With a Chaser
A Menu of Ideas to Fill Five Market Baskets
Funds: Finding Funds with Conviction
Stocks: So You Say You Want Income?
All Eyes on China
Mutual Fund Analyst Picks
Undervalued Stocks
Most Popular Variable Annuities
What’s New at Morningstar and on the Web
The Advisor’s Economic Moat
Morningstar Advisor - Summer 2007 - Intro
Morningstar Advisor - Summer 2007 - Morningstar Advisor - Summer 2007
Morningstar Advisor - Summer 2007 - Cover2
Morningstar Advisor - Summer 2007 - Contents
Morningstar Advisor - Summer 2007 - 2
Morningstar Advisor - Summer 2007 - 3
Morningstar Advisor - Summer 2007 - 4
Morningstar Advisor - Summer 2007 - Letter from the Publisher
Morningstar Advisor - Summer 2007 - 6
Morningstar Advisor - Summer 2007 - 7
Morningstar Advisor - Summer 2007 - Get to Know the Bond “All-Stars”
Morningstar Advisor - Summer 2007 - 9
Morningstar Advisor - Summer 2007 - Research Briefs
Morningstar Advisor - Summer 2007 - 11
Morningstar Advisor - Summer 2007 - Our Stewardship Test Gets Tougher
Morningstar Advisor - Summer 2007 - 13
Morningstar Advisor - Summer 2007 - Save It for Later
Morningstar Advisor - Summer 2007 - 15
Morningstar Advisor - Summer 2007 - Too Many Oranges
Morningstar Advisor - Summer 2007 - 17
Morningstar Advisor - Summer 2007 - Best of Both Worlds
Morningstar Advisor - Summer 2007 - 19
Morningstar Advisor - Summer 2007 - 20
Morningstar Advisor - Summer 2007 - No Two Clients Are Alike
Morningstar Advisor - Summer 2007 - When It Comes to VAs, It’s Seller Beware
Morningstar Advisor - Summer 2007 - 23
Morningstar Advisor - Summer 2007 - 24
Morningstar Advisor - Summer 2007 - 25
Morningstar Advisor - Summer 2007 - 26
Morningstar Advisor - Summer 2007 - 27
Morningstar Advisor - Summer 2007 - 28
Morningstar Advisor - Summer 2007 - Hands On: Finding the Suitable Fund Share Class for Your Client
Morningstar Advisor - Summer 2007 - 30
Morningstar Advisor - Summer 2007 - 31
Morningstar Advisor - Summer 2007 - 32
Morningstar Advisor - Summer 2007 - 33
Morningstar Advisor - Summer 2007 - Fund Style Can Drift Off Course
Morningstar Advisor - Summer 2007 - 35
Morningstar Advisor - Summer 2007 - 36
Morningstar Advisor - Summer 2007 - Sticking to Their Style, Through Thick and Thin
Morningstar Advisor - Summer 2007 - 38
Morningstar Advisor - Summer 2007 - 39
Morningstar Advisor - Summer 2007 - 40
Morningstar Advisor - Summer 2007 - 41
Morningstar Advisor - Summer 2007 - 42
Morningstar Advisor - Summer 2007 - Marathon Man
Morningstar Advisor - Summer 2007 - 44
Morningstar Advisor - Summer 2007 - 45
Morningstar Advisor - Summer 2007 - 46
Morningstar Advisor - Summer 2007 - 47
Morningstar Advisor - Summer 2007 - Growth, With a Chaser
Morningstar Advisor - Summer 2007 - 49
Morningstar Advisor - Summer 2007 - 50
Morningstar Advisor - Summer 2007 - 51
Morningstar Advisor - Summer 2007 - A Menu of Ideas to Fill Five Market Baskets
Morningstar Advisor - Summer 2007 - 53
Morningstar Advisor - Summer 2007 - 54
Morningstar Advisor - Summer 2007 - 55
Morningstar Advisor - Summer 2007 - 56
Morningstar Advisor - Summer 2007 - 57
Morningstar Advisor - Summer 2007 - Funds: Finding Funds with Conviction
Morningstar Advisor - Summer 2007 - 59
Morningstar Advisor - Summer 2007 - Stocks: So You Say You Want Income?
Morningstar Advisor - Summer 2007 - 61
Morningstar Advisor - Summer 2007 - 62
Morningstar Advisor - Summer 2007 - All Eyes on China
Morningstar Advisor - Summer 2007 - 64
Morningstar Advisor - Summer 2007 - 65
Morningstar Advisor - Summer 2007 - 66
Morningstar Advisor - Summer 2007 - 67
Morningstar Advisor - Summer 2007 - Mutual Fund Analyst Picks
Morningstar Advisor - Summer 2007 - 69
Morningstar Advisor - Summer 2007 - 70
Morningstar Advisor - Summer 2007 - 71
Morningstar Advisor - Summer 2007 - Undervalued Stocks
Morningstar Advisor - Summer 2007 - 73
Morningstar Advisor - Summer 2007 - Most Popular Variable Annuities
Morningstar Advisor - Summer 2007 - 75
Morningstar Advisor - Summer 2007 - What’s New at Morningstar and on the Web
Morningstar Advisor - Summer 2007 - 77
Morningstar Advisor - Summer 2007 - 78
Morningstar Advisor - Summer 2007 - 79
Morningstar Advisor - Summer 2007 - The Advisor’s Economic Moat
Morningstar Advisor - Summer 2007 - Cover3
Morningstar Advisor - Summer 2007 - Cover4
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