Money: Cold calls can get you into hot water

  • @simonnread
If you ever get a cold call from so-called "investment expert" offering a share tip, be very wary. How does he or she know what your investment goals are?

Professional stockbrokers only make recommendations after they have a clear picture of their clients' attitude to risk and their long-term investment aims.

"Before I can give advice it's important that I understand a client's overall financial circumstances," says Chris Ring, head of stockbroking at NatWest Stockbrokers. "Then I need to understand what that client's objectives are. The important thing when you're offering a personal service is to assess the personal circumstances, attitudes and objectives of your client, for example their personal preferences, such as if they don't want to invest in tobacco shares."

Most private client stockbrokers agree. Understanding the client is the key to building the right investment portfolio. In general terms, however, there are usually two key factors that drive the investment criteria decision: the age of the client and attitude to risk.

"In broad terms, clients fall into three categories. There are those requiring income, those wanting growth, and those wanting a balance of the two," says Michael MacDougall, head of private clients at Waters Lunniss, a firm of brokers. "Within that we have sorted the risk of different investment into low, medium or high. Most investments fall into low or medium."

Low-risk, says Mr MacDougall, includes gilts, good quality rated bonds and shares in the FT-SE 100 index. Medium risk includes other bonds and the share profile stretches to include stocks of companies in the FT-SE 250 index. High risk means: "In consultation with the client, anything goes," he says. "We keep a current list of stocks we like, tailoring the choice of particular shares to a client's individual requirement."

Whether you are seeking income or growth is likely to be influenced by your age, according to Matthew Orr, partner at Killik & Co, a firm of brokers in London. "In general, younger clients don't need to worry about [investment] income and so can take a higher risk," he says. "As they move towards middle age and retirement looms on the horizon, they become more of a medium risk person. When they near retirement age they want a blue chip investment and, later in life, they look for out-and-out income. We really want to know from clients whether they fit into that standard model."

"The stock market has a spectrum of risk," Mr Orr continued. "At one extreme there are index-linked gilts offering a large degree of safety, while at the other end there are tiny companies making no money now but with the potential to grow in the future. Depending on where you are in your life cycle, will decide the sort of risk you can take."

On that basis he suggests younger investors, a 30-year-old say, might be looking at the potential offered by technology stocks, or going for emerging markets, where the long-term trends remain potentially quite rewarding, but are clearly very high risk, witness the current market shake-out. By the time they reach 45 to 50, they need to start protecting capital. Then they are likely to want to move their investments into blue chips and quality names.

"When you retire, you're likely to want to move your portfolio into safer investments, such as gilt edged stock, as income will become an important element in the decision making. When you get into your 70s, you will be seeking to maximise the highest level of income that you can," says Mr Orr. One of the major determinants in constructing a portfolio for an investor is also the amount of cash available for investment, according to Stephen Vakil, director of Quilter & Co, a firm of brokers. "A stock market portfolio should represent only part of an investor's overall wealth, which would normally include property, pension provision, perhaps National Savings, and cash."