Tools of the trade

Toolbox

A tool is a device that can be used to produce or achieve something. A tool can also be a procedure or process used for a specific purpose. Tools have been used throughout history to not only make life easier but to get more accurate results. Tools are used as a catalyst in your process of finding out whatever it is you need to find out or whatever it is you’re trying to achieve.

In the investment business, we use many different types of tools to get and use information, from periodicals, magazines, conversations and seminars to financial calculators and computers. The computer has transformed the way we get and use information, in that it gives us access to tools that can obtain data, and gives us a more efficient way to analyze that data.

For example, one type of tool in an advisor’s toolbox allows you to run “what-if” scenarios for projecting your client’s ending wealth:

Retirement "Ending wealth" sample chart

This hypothetical example is for illustration only and is not intended to reflect the return of any actual investment.

The right tool for the job

With all the tools to choose from, how do you go about selecting the right one? A good place to start is the needs of the investor, and what you feel comfortable presenting.

The tools range from determining the feasibility of obtaining goals to determining how much risk clients are willing to accept to satisfy those goals. Each tool may get them to the same place (ultimately a recommended investment portfolio), but may focus on different sacrifices, such as the need to save more, work longer, or become a more aggressive investor. There is a certain amount of scrutiny that should be placed on these types of tools when making decisions as the assumptions that feed the analysis need to be realistic.

There are also different ways to access those tools. There are do-it-yourself tools, allowing you to adjust the assumptions at your own pace, to full service tools where you rely on an expert to do the analysis and create the recommendations in consultation with you. You need to weigh the opportunity costs of one versus the other – time and expertise versus immediacy and flexibility.

Some things to keep in mind as you evaluate the tools available to you:

  • The cleaner the better – A tool should help you succinctly combine, summarize and present information to a client.
  • The back of a napkin vs. tables and graphs – The complexity of the analysis and output from the tool can offer you a competitive advantage.
  • Time to spend with clients – Tools should free up your time, allowing you to spend it retaining or gaining new clients.

Jon Schuette is a senior portfolio strategy analyst for Russell Investments’ U.S. private client services consulting group.

RFS 12120-h

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