Most of a financial professional’s clients are concerned. If they weren’t, they probably wouldn’t have hired a financial professional — even if their main concern is simply delegating the hours necessary to maintain the minutiae in their financial life so that they can do other things.
Yet even beyond freeing up their time, many better clients are looking to be educated consumers and want to make good, informed decisions in their financial lives. To that end, it is my belief that the wealth manager responsible for orchestrating everything needs to make education and information clarity a part of their standard operating procedure.
Water will ultimately find its own level with respect to education and information client-by-client. Some will want as much education as you can provide, and others will want to do enough research and due diligence to corroborate your advice to help them make informed decisions.
You’re not alone
In addition to your voice throughout the tenure of your client relationship, there will be others chirping in your clients’ ears that are tough for them to ignore. These other sounds may be coming from family, friends, neighbors, the news or general water-cooler talk. And, of course, this is the information age so we can’t forget the good ol’ Internet. We all know that there is no shortage of information and opinions on financial matters and that no one firm, person, publisher or Web site has a lock on all the technical answers that one may need throughout the course of a financial lifetime.
How do we then help our clients to use or ignore all of this ubiquitous information that may help or confuse them? It starts with time. As professionals, we value time as much as or more than any other commodity known to mankind. And it is that high regard for time and efficiency that causes many firms to err in the delivery of high-end financial advice. Because we are such a smart group, accountants and tax professionals sometimes have a tendency to short-cut the education process and jump right to the advice part.
This doesn’t necessarily stem from a lack of compassion or not caring about what is important to the client. It stems from all the years of technical training and experience that gives CPAs the confidence to jump right to what they perceive is the highest and best use of money and time.
But with this zeal for delivering accurate and timely advice, the CPA sometimes overlooks the fact that some clients need more time with you to understand everything before they just go along with what any one person says.
Especially when it comes to the world of personal finance — nearly every good client has experienced someone in the financial services industry who has left them feeling underserved somewhere along the line. But unfortunately for many clients, they don’t even know if they’ve been let down because they don’t have a wealth manager or financial head coach to oversee and manage all of the important professionals to be sure that all of the moving parts are all tied together and properly implemented.
So, in short, the first and best way to help your clients ignore the things they read or hear is to provide an environment where clients understand that every topic is fair game, and that each and every question and concern of theirs will be addressed throughout the tenure of your wealth management relationship.
Ignore the news
The hardest news or water-cooler chatter for your clients to ignore is typically in the investment area. It’s tough to ignore something that occupies headline news every day, especially if that news is bad, but even when the headlines are extremely positive, and the average Joe starts to think that investments can’t go down. Some clients may begin to ask you why their portfolio isn’t keeping up with the gains that they hear about on the news.
When you get this question, you either didn’t provide enough education upfront or the client may need more education. Headline news is just that — headline news. It is designed to get ratings and highlight the emotional part of investing with a focus on the winners and losers. The education about markets should start broadly, with a basic understanding of asset classes.
There are more asset classes to invest in than most investors consider. There are cash, fixed income, equity, commodity, currency, private equity, real estate, domestic and abroad, to name a few.
Each asset class has its benefits and its risks. Cash, for example, has virtually no principal risk but it does bear two obvious risks. That is inflation and purchasing power diminution. And, on the other extreme, if you invest in a privately run business, you should know that you can lose 100 percent or more of your money if you have used leverage. In exchange for that risk you are betting that the company will grow in value to deliver greater rates of returns than your current guaranteed or fixed-income options.
If your clients want headline-like returns, then perhaps they should invest in low-cost indices. But before they do that, they may be well served by you to have a clearer focus of exactly what type of volatility they may encounter.
While past performance is no indicator of future results, you should still let them see for themselves what type of history the index they seek to replicate has had and probe deeply on their comfort level about losing significant amounts should history repeat itself at some future point.
Next may be an education on risk. Again, this education can be a slippery slope. Most clients have a general understanding that if your desired rate of return is greater than what you can earn in a guaranteed environment, there is some sort of risk. Try to quantify the risk that they are currently taking and how much risk you believe is needed to meet their required rate of return over their lifetime. Naturally, this is a moving target, where in some years you’ll achieve your objective, while in others you may be woefully short or gleefully pleased.
Quantifying risk is where the slope gets slippery. Your engineer clients will want to understand alpha, beta, standard deviation and Sharpe ratios. It’s up to you to decide just how deep you want to go into these issues. For me, my head gets dizzy enough from using standard deviation, let alone wrapping in all of the other technical factors that go into the portfolio composition process.
Nevertheless, not every firm is blessed like I am with dedicated investment expertise in-house at my fingertips. For many, a plain English education on standard deviation and using their existing and proposed portfolios in your analysis should give them some idea as to the level of volatility that such a portfolio has delivered historically. After this education, most clients will understand why it may not be in their best interests to invest to meet or beat the frequently touted indices in the headlines.
One subset of risk is the conversations about super-performing investments. Much of the standard water-cooler talk that is promulgated around investments has to do with touting your winning picks. Those who boast about investment performance are like the classic front-running fans in sports — in love when their team is on top but nowhere to be found when the team is losing.
Nevertheless, as a result of conversations like these, some of your clients want to set up a trading account so that they can “play the market.” Their language alone should tell you that this is not likely to succeed as a serious endeavor.
Allow, or even facilitate, their trading account and keep it in your system so you can track it. Typically these hot investment tips that they feel compelled to act upon will fade away with losses that are likely to keep them focused on their day jobs. Should, by chance, they have extreme success in their “playing,” you are likely to receive increased pressure about investment performance. But don’t lose all faith. If most investment professionals have a hard time reaching or beating their benchmark, the casual market player is also likely to struggle.
Hearsay and headline news often permeate other areas of personal finance. Insurance, for example, seems to be as prolific an advertiser as the auto industry. Commercials lead people to believe that you can save premiums with a call, endow families with the stroke of a pen by acquiring life insurance, and get a trusted financial partner from a proprietary product-driven financial salesman.
Information is good. Facts are good. Even commercials in mainstream media can be good. Our mission as a client’s proactive, holistic wealth advisor is to make sense from all that noise and to help them chart a path that suits their lifestyle, time frame, tolerance for risk and life plan.
The only way to cut through that noise and help your clients is to get in front of it by doing the most thorough job that you can with the planning and your client service plan. Over time, the flow of issues that clients bring to you will slow if you invest the time to give a thorough evaluation of their issues and make the time to speak with them about something that has come to their attention and appears important to them.
