Determinants of Financial Success

Jahnke, William
June 1998
Journal of Financial Planning;Jun98, Vol. 11 Issue 3, p34
Academic Journal
This article argues that the question of what determines financial success can be addressed in the context of what determines the financial success ratio (FSR) of a client. The investment return assumptions are critical in projecting the FSR of a client. The advisor needs to project the returns on money market investments, asset allocation, marketing timing and security selection. Market math also can be used to forecast downside returns, which result from asset allocation, market timing and security selection underperforming mean expectations. Evaluating investment alternatives in terms of FSR and downside FSR represents a significant departure from modern portfolio theory solutions produced by single-period mean-variance portfolio optimization. In conclusion, it is future portfolio value and retirement income that is at the heart of concerns of most clients. To determine the relative importance of any financial variable on the prospective value of the portfolio of a client and his or her FSR, there is no substitute for doing client-specific financial modeling. The challenge to the industry is to meaningfully quantify and integrate financial planning and investment management. Quantification permits the evaluation of the relative importance of the determinants for financial success and provides the advisor the basis for determining the most appropriate investment program in terms of most likely and downside portfolio values.


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