2 financial principles that show whether clients are ready to invest

There are a couple of requirements clients should meet before they start picking stocks

Nov 13, 2019 @ 3:41 pm

By Jamie Hopkins

When I tell someone I work in personal financial planning, they always want specific answers to issues plaguing their own financial situation. One of the most common questions I hear is, "What stock should I invest in right now?"

If you're an adviser, you likely get that question a lot from your clients. As you know, most financial planning decisions are unique to each client — that's why it's called personal finance. Everyone has goals, needs and wants, but just like a fingerprint, their financial situation is one of a kind.

But one thing clients share is that they probably shouldn't be investing unless they meet certain criteria. Not everyone has the capacity to invest in individual stocks — the right must be earned.

No, this isn't an attempt at elitism, it's just common sense. Any potential investor must be able to gain and retain wealth — without assets, investing is near impossible.

Whether you're working with a prospect, a new or a long-time client, make sure they're ready to invest before they dive in. Vet them on these two fundamental financial principles — having a firm grasp of both will help anyone in their pursuit of wealth.

[More: Encourage financial literacy by speaking to clients' emotional priorities]

1. Invest in yourself

For most people, the ability to earn a living over the course of their life is the single most valuable asset they'll ever have. Without an income, the funds available to invest are limited.

So the more secure they can be in their ability to earn an income, the better.

Continuing education helps develop skills and maintain marketability as an employee. I've been a professor for eight years and have more designations and degrees than I care to admit. But you don't have to solely rely on traditional academic institutions. Mentorship programs, coaching, continuing education programs and conferences are all viable options to improve skill sets and expand minds.

When someone invests in themselves, they reap the benefits professionally and, in turn, financially. Building a strong foundation that generates a steady income is paramount to creating a stream of investible assets.

[Recommended video: Personalization and custom communications are key to the evolving client experience]

2. Become financially literate

Before anyone can begin investing in anything other than themselves, they need a basic understanding of finance. Even when outsourcing financial planning to an adviser like yourself or other specialists, investors still make decisions regarding money, so it's best if they're informed and educated.

According to the National Financial Educators Council, a lack of financial literacy costs the average American nearly $1,200 a year. I've done research on retirement income literacy and found higher levels of literacy are correlated with higher retirement satisfaction and improved planning measures (such as having an estate, long-term care and retirement income plan).

Encourage your clients to learn financial basics at home. Have them ask family members and friends about topics like budgeting, managing debt and credit cards. Recommend articles, books and podcasts.

They don't need to become an expert on any subject, but knowing a little about key financial topics will help them make better and more confident decisions regarding their finances.

To earn the right to invest, individuals must first invest in themselves and develop a baseline of financial literacy. Learning how to develop, gain and retain wealth is necessary to attain investible assets. Without the ability to earn an income and a solid foundation of financial planning tenets, stocks and investments may not weather your clients' financial futures particularly well.

So before you walk clients through stock options, confirm they have earned the right to invest.

[More: How to handle a client with low risk tolerance]

Jamie Hopkins is director of retirement research and vice president of private client services at Carson Group.


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