As discussions heat up between the SEC and FINRA surrounding a new fiduciary standard, we continue to take a close look at ways advisors can get ahead of the game. In this multipart series, we're looking at how advisory firms can implement a principles-based fiduciary standard into their investment decision-making process, and the leadership behaviors that can help them to complete each step. Last month, we delved into the first step: Analyze. This month, we move on to the second: Strategize.

There are four dimensions to Strategizing, which we warmly refer to using the acronym "RATE": Identify sources and levels of Risk, identify Assets, identify Time horizons, and identify Expected outcome s.

IDENTIFYING RISK

The term "risk" has different connotations, depending on the client's frame of reference, circumstances and objectives. Typically the investment industry defines risk in terms of statistical measures such as standard deviation. But, as we saw over the past two years, these statistical measures often fail to adequately communicate to the client the potential negative consequences an investment strategy can have on his ability to meet his goals, particularly short-term ones. Recently we've seen clients who overestimated their risk tolerance and are now looking at risk very differently.

For this column, I define risk as the probability that the client will not achieve his goals and objectives. Applying such a definition means that cash could be "riskier" than equities if the investment strategy isn't structured to offset the effects of inflation, or if the client abandons his equity strategy because of unwelcomed volatility.

For this reason, I have found the most effective way to conduct a gut check with the client is to ask: "How much money are you willing to lose in a given year?" The response to that question often is more revealing than any information I can glean from portfolio modeling and optimization software.

As indicated in the previous column, we are also looking at the leadership behaviors that are essential in the management of investment decisions. For this first dimension, the leadership behavior is "Prudent:" The client can't avoid risk, but advisors can lead the client through a process of prudently managing-and planning for-the risks ahead.

IDENTIFYING ASSETS

Much has been published about asset allocation, and the advantages and disadvantages of the various asset classes. Instead, I focus on other types of "assets" that come into play when developing an investment strategy:

* Your ability to access top-tier money managers and custodians;

* Knowledgeable staff and peers;

* A solid working relationship with other professionals serving the client, such as accountants and attorneys;

* Technology and systems infrastructure, such as electronic protocol, to link to the client's money managers and custodian(s); and

* Vendor relationships, which prove priceless during an economic crisis.

One critical asset advisors often overlook-one tied to leadership behaviors-is their ability to build trust and loyalty with clients, staff, vendors, money managers, custodians and peers. Those who fail to build this trust are often faced with higher investment management costs, delays in accessing critical information and in execution, and poor customer service. When people trust you, they go the extra mile, and they give you the benefit of the doubt. These are essential assets when you're managing through the bumps in life.

TIME HORIZONS

One critical role you play as an advisor is helping to ensure that your client has sufficient liquidity to meet financial obligations when they come due, whether those obligations are retiring or funding a child's education. As a tragic example: The current crisis has forced a number of highly regarded universities, colleges, foundations and endowments to sell illiquid assets at significant losses in order to meet liquidity needs.

As a best practice (some say it's a fiduciary requirement), you should prepare a cash flow statement for every client. This statement should show anticipated contributions and disbursements for, at least, five years out. Such a cash flow analysis is essential in determining the client's investment time horizon.

EXPECTED OUTCOMES

Expected outcomes differ from the client's goals and objectives in that they represent quantifiable results that the advisor expects to be achieved over a shorter, specified time horizon. For example, an expected outcome may be to produce a total rate of return that exceeds the rate of inflation by a certain amount. Identifying expected outcomes can help in three ways:

1. They are necessary aids to the asset allocation inputs: When using asset allocation software, often one of the driving variables is identifying a desired rate of return.