Try Candor and Humility With Your Clients

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For a financial adviser, there are few conversations tougher than telling a client that his portfolio has gone down in value. There are the obvious empathetic pangs that come from loss — after all, a major perk of my business is the joy I derive from playing a leading role in the realization of my clients’ financial goals.

Graduations, weddings, grandchildren are milestone momentsthat I like to think are made sweeter by the returns delivered through my efforts. But, oh, that double-edged sword feels like it cuts deeper on the downside. Inescapably, if I take pride of ownership for providing for life’s joyful moments, I also own a share of the challenges presented by a steep loss in a client’s portfolio value. There’s no denying it hurts.

From a practical standpoint, too, it can be an awkward conversation to tell your clients that, despite the fact the portfolio is down, it’s billing time. Given the market volatility of the last five years, we’ve all had those conversations — and they never get easier. (More: How to Drop Your Adviser)
Both the empathetic and the practical considerations of the inevitable short-term loss demand a hard and fast strategy for preparing investors for loss— before they ever become clients.

So, you want us to grow your money for you? Here’s a quick question: “How much can you stomach to lose? If we put you in that 60/40 index portfolio, would you stay in if it dropped 30 percent in 12 months? Because in the 50-year data, it did.”

Not your typical sales strategy, is it? But it’s the best one for preparing our clients for the fact that the expectation of wealth travels in lockstep with the expectation of short-term loss due to market volatility — think of that double helix we all recall from ninth-grade biology; the strands are inextricable. (More: Picking Your Adviser)

The good news about asking our prospects about their ability and willingness to endure such a ghastly short-term loss is we can also tell them that the same 50 years of data show that 60/40 index portfolio delivered a 12-month gain of more than 41 percent.

Both the high and low are anomalous events, and we would expect that portfolio to deliver an annual return of 9.55 percent with a level of uncertainty as measured by standard deviation of about 9.49 percent. That’s the story we tell our potential clients.

Back in 1892, Sir Arthur Conan Doyle’s Sherlock Holmes cried, “’Data! Data! Data! I cannot make bricks without clay!”

Some 120 years later, this is the mantra at my advisory firm. We rely on nothing but data when we work with prospects to identify the most-appropriate portfolio for them, and to best prepare them for the bumpy road they must expect to travel as clients if they choose to walk with us on the path toward wealth.

It’s simple, but it’s not easy. Quality, long-term index data make it as easy as it can be.

The financial services industry is rife with advertisements that depict smiling seniors walking down a quiet country lane, or holding hands in beach chairs as they stare serenely at the waves lapping over the sand. Beautiful images, to be sure, but aren’t they selling a dream of wealth without the reality of occasional losses? (More: Avoiding Financial Abuse)

We as financial advisers know no such utopia exists. And doesn’t this dream selling make the inevitable market decline that much more painful to face clients and talk about their portfolios? It would certainly make billing time unpleasant.

So how can we foster long-term relationships with our clients that will make it easier to face them when the market has declined as well as the value of their portfolios? By providing them with some good old-fashioned honesty — admitting to ourselves as much as to our clients that we cannot know what the marketswill do, but knowing what markets have done.

Based on long-term data, we know that markets have rewarded dedicated, committed investors who have stayed the course regardless of market conditions. I don’t sell the dream. I educate investors with data.


Mark Hebner is the founder and President of Index Funds Advisors, Inc. He is an Investment Advisor Representative (Series 65) and has a Master’s of Business Administration from the University of California at Irvine and a Bachelor of Science in Pharmacy from the University of New Mexico.

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