We Still Need to Ask Clients the Tough Questions

Morningstar Advisor Magazine June/July 2010 Issue

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		Posted: by Carl Richards \| Bio \| Feed
		11-19-09 \| 7:31am

We Still Need to Ask Clients the Tough Questions

With the S&P 500 up more than 60% from those dark days in March, it is becoming very easy to forget what it felt like to hold course in the face of what was clearly some very uncertain times. If you need a reminder, this video may help.

You may have already forgotten, but back then, there was an almost universal recognition that talking about risk in a "lifeboat drill" sort of way is completely different than EXPERIENCING IT.

Risk is funny that way: You can't understand it until you feel it.

I'm sure that you had the same conversations with clients that I did. Client wants to sell. You think it is a bad idea to sell AFTER being down a bunch, so you play all the mental ninja tricks you can to get them to stay the course. If you were successful, they stayed the course, and now they are up a bunch because of it.

But wouldn't now be the time to remind them what it felt like? Remember that conversation about how we (and they) wished we had taken less "risk"? Remember how they promised that if we just got out of the lifeboat and back on to the ship we would be more careful next time?

One of the things that we did in our practice was to ask clients to write themselves a little letter, a note about how they felt about the risk they were experiencing. I wanted them to write about this desire they had for lower risk, and the fact that they were more than willing to accept the lower expected return that comes with it. We told them to label the letter "Open When I Feel Like Increasing My Equity Exposure" and tuck it away for a while.

Well, the time has clearly come to open that letter!

Who knows where the market is headed from here, but when the very same people that could not sell fast enough at the bottom now want it all back in, it is time to revisit the plan.

So now what?

If they wanted out, but only stayed in because you walked them in off the ledge, do you make a change to their long-term allocation?

If you rebalanced into the market back then, shouldn't you be rebalancing out of the market now?

What if someone sold back near the lows on their own, and now wants back in because things "have cleared up" and Big Ben Bernanke has said the coast is clear? Do you allow them to buy back in under your watch?

Clearly, the tough questions didn't end in March.

behavioral finance | financial planning | investing

Reader Comments (6)

November 20, 2009 8:24:31 am

I have to laugh at anyone who would waste a readers time by predicting what will happen in the future. If there is one lesson to learn from this crisis, it is...do not listen to people who make market or stock predictions. That includes all predictions....predictions of where the market will go, economic predictions, earnings and stock predictions. That being said, Carl I love your article! Most investors only have short term memory and zero long term memory. Greed erases all memories of fear. There is an emotional disconnect. Your idea of having clients write letters is brilliant. Great job. And for those that write about the directions of markets...STOP. Give us and the investing public a break.

- Michael Weiss, NYC

November 19, 2009 9:40:54 pm

Again, without the context of a broader strategy or plan, the decision of when to invest or when to sell in a panic is purely speculative and emotionally driven.

If a client was panicking in March and wanting to sell, it's the advisor's responsibility to show the client the possible impact of that decision to his/her long-term plan.

Likewise, if a client sold in March and is now sitting in cash, a trusted advisor needs a way to demonstrate to the client the ramifications of a cash portfolio on their long-term plan. To offset a portfolio that's sitting on the sidelines, a client will have to really ramp up their savings and/or defer the timing and amounts of their goals.

Sure, it's the client's money, but it's our responsibility as advisors to show them the range of outcomes they could experience based on these decisions. Short of that, to fall back on the it's the client's money line amounts to assisted suicide.

Also, I think we need to show clients how they can make minor adjustments to their plan along the way to maintain confidence in their plan. Unfortunately in most traditional planning, the plan is reviewed every 1-2+ years which can result in the need to make some MAJOR adjustments. This can be dangerous to the client's financial life and their emotional health.

Remember, we (and our clients) only get one shot at life, and I believe it's my primary responsibility to help them make the most of it.

Sorry for rambling.

- Russ, Atlanta, GA

November 19, 2009 7:31:32 pm

If they jumped in March, then keep them out now. The current market has no connection with reality. It's institutionals buying up the market to draw the little guy back in. Then expect a 30%+ drop at least after Holiday sales are released. If they stayed in, tell them to sell NOW, to avoid the next crash.

There is nothing. Let me repeat that. NOTHING in the fundamentals that says the current rally is sustainable. This will be a W recovery, and it is likely you will never see the right-most leg of that W.

Give me ANY reason a recovery is possible. Business investment in ERP/y2k/eCommerce/BPR pulled us out of the 1992/3 recession. Low interest rates and consumer debt pulled us out of the 2002/3 recession. Interest rates can't go lower, the consumer has no more money/credit to spend. JOBS is the number one issue, and profitable companies with strong balance sheets are still laying off en-mass to pump their share price. And government stimulus is just ending up in the wallets of the mega-rich, who have no reason to spend more.

There is simply no reason for a sustainable recovery. The market will crash in early 2010.

- Jim R, Minneapolis

November 19, 2009 4:25:44 pm

These 2 comments bring up a fascinating and important question:

Of course it is always the clients money and in the end they can do whatever they want, but do you get paid to give advice, or to be a order taker for people that want to self diagnose?

As an advisor, it is my opinion that we should take the time to diagnose and then WE prescribe. We decide the best course of action because that is what a professional does. If the client refuses to take that advice, seems to me that it is time for them to find a different advisor.

The other approach is the the brokerage model (Oh, you don't like green, here I have that in red as well). That is nice because you can change your advice to to keep the client. But that feels like selling what someone might want, instead of what they (in your professional opinion) really need.

I think it goes without saying that these has to be some real time spent to properly diagnose and that process will require adjustments over time, but in the end shouldn't it be you that gives the advice?

Now there might be a good reason for you to advice to change, and there might even be a good reason for you to advice someone to sell in March of this year (if there quality if life was so impacted etc...) because you got new information about their REAL risk tolerance.

I

- Carl Richards, US

November 19, 2009 1:45:03 pm

Hey, at the end of the day, it's the client's money! They need to feel like they can do what they feel is best, even when it runs counter to the adviser's recommendation. More than once I have stayed with the plan and lost 40%, when a simple sale would have reduced that to 10% or less.

- Rusty, Cville, Virginia

November 19, 2009 12:47:59 pm

Carl,
Advisors should continue with their disciplined approach through rebalancing portfolios. Client emotions should not drive these decisions, investment policy should (and one the client has agreed upon). At this point, yes, this may mean taking profits from the stock asset classes and buying fixed income. However, due to Ben's dilemma with interest rates, advisors should consider remaining on the short-end of the yield curve with fixed income.
Consider adopting a policy if the client sold out against your better judgement, they have to decide when to get back in. Through this communication, clients tend to reconsider as this is why they hire us (to control their emotions, among others) in the first place.
Look forward to your comments.

- Curtis, Sugar Land, TX