Discretionary Investment Management

finance a la shmoop what are prudent invest our rule standards via know your

client rule and unsuitable recommendations well let's start with

the prudent investor rule standards their standards for what is rational [Man discussing prudent investor rules]

like those who can't afford to take a ton of risk think little old ladies who

are retired with just enough money to make it to you know the end well they [Old woman with pocket watch]

can't afford to take the risk of volatile equities like a small cap fund

that can whipsaw 30% up and 30% down in any given year no way not acceptable not

suitable not prudent or what about they're investing in a venture capital

fund or a private equity fund that takes seven years or more before it normally

even begins to distribute IPO sales or proceeds so no in seven years that [Woman counting cash]

little old lady is more likely doing the backstroke 24 by 7 yeah well

recommending venture capital investments to a little old lady who needs cash [Old lady and little pooch graves]

liquidity to make payments on her dentures is an unsuitable recommendation

you can't do that so what's prudent or suitable for her well bonds government

bonds shaken not stirred maybe a few corporate bonds and maybe a spicy 10 or [old lady's portfolio piechart appears]

maybe 20% of her portfolio allocated to equities with a lot of safe boring

dividend yield think companies like AT&T and GE and IBM oil companies a whole lot

of nice boring math on her way to the grave then what if the client is a [Insurance company man approaches girl with cheque]

parentless teenager who just inherited a million bucks from mom and dad courtesy

of the insurance company of the drunk driver who killed them both when they [Police sirens appear]

cross the double yellow line should that teen be in government bonds no that

would be unsuitable at least not all in government bonds in fact probably very

little in government bonds why well for that teen a heaping allocation to a

small calf equity fund is totally prudent appropriate and smart because [Equity fund growth graph appears]

that teen likely has decades maybe even half a century before she'll want to

call or use that money so time will bail her out of the year-to-year short-term

volatility because over time the market goes up and

usually a lot let's gaze for a moment on this beautiful S&P 500 stock chart for [Stock chart for S&P 500]

glassed-in and give her to take century kind of lovely well the basic idea for

this rule is that the financial advisor has to recommend investments that are [Financial advisor reading piece of paper]

prudent and appropriate given the client's age health financial needs

appetite for risk their own career strength likelihood of being abducted by

aliens etc and a time at which point they'll need to turn their investments [Alien spacecraft hangs over city]

into cash to pay for stuff well the good financial adviser knows her client and

there actually is a rule called the know your client rule but you can only know

them so well before you start you know crossing the lines [Man sleeping and woman lying awake in bed]