Even two years after the recession has officially ended, all eyes remain on financial professionals. The good news is that investors are regaining trust in the industry—according to a Northstar/Sullivan Rebuilding Investor Trust study, investors’ trust in their financial advisor has increased from 61% in 2009 to 74% this year. Some of this growing trust can be attributed to the current industrywide movement toward a more transparent and ethical practice. It’s spearheaded by groups like the Certified Financial Planner Board of Standards, which launched a campaign entirely around consumer advocacy, and websites like SlashDeclare, which encourages better guidance and a commitment from financial pros to act in the best interest of their clients.
But even with the industry regaining respect and trust from investors, economic uncertainties continue to have a negative impact on clients, and advisors are often finding themselves in a position of enabling their clients to make poor investing decisions that hurt their financial goals. That’s because most often the mistakes advisors make in enabling clients are the ones they’re too close to—they often don’t realize they are even making them. Here are the top three mistakes we’ve seen advisors make over the years and how you can avoid them in your practice:
Mistake No. 1: Enabling Clients to Act on Emotion
It is human nature for us to want to succumb to our emotions, especially when it comes to our money. Because of this, advisors play an important role in helping clients avoid mistakes that could derail their financial plans. Yet according to a 2010 study co-authored by Harvard University behavioral economist Sendhil Mullainathan, advisors are too often enabling clients to make investing decisions based on emotion. The study reported advisors typically took on a “yes man (or woman)” role with their clients in an attempt to keep them happy and continue working with them.
Though it may be difficult to approach a client with any guidance when they’re stuck on making an emotional decision (like selling underperforming stocks immediately after a downward swing), in the long run investors will value an advisor more who makes them think twice, rather than an advisor who simply acts on their wishes. When you first begin working with a client, educate them about the impact emotional decisions have on investment performance. For example, share the results of a Fidelity study that reported that 401(k) participants who moved to cash during the market drop in 2008 and 2009 earned just 2% through the first half of this year, but those who stayed in and stuck with their long-term strategy earned a whopping 50%. This helps your clients avoid the pitfalls of getting caught up in the market hype or performance from the moment you start working with them.
When a client comes to you already in a panic, try to take them back to their original goals and how their investments are faring in meeting those goals. Ask them if you can arrange a meeting or time to talk a week or two from then, so they have a chance to sleep on it. Be their reminder to stop and think through the situation rationally—like a warning box that pops up before you delete an email—make sure they are aware of what they’re about to do and have thought it through completely.
Mistake No. 2: Enabling Clients to Avoid the Difficult Issues
An advisor’s job is a lot like a personal trainer’s. No one hires a personal trainer because they want a nice after-work hobby. They hire a personal trainer because they know they’ll push them to do things they don’t want to do but which they also know are imperative to actually accomplishing their fitness goals. People usually hire advisors for similar reasons. They should expect that you will tell them when they’re doing something wrong because, in the end, their main concern is achieving results.
Rather than periodically checking only clients’ fund managers’ performance, be proactive about addressing the not-so-fun issues. Set up workshops for clients to attend on estate planning and other uncomfortable issues. In an environment like this, a sense of community can be created, and clients will see that others find the issue important as well. As educators of retirement plan participants here at Financial Finesse, we often find people respond to being able to openly share their concerns. Cover issues like estate planning, making retirement income last, life insurance and long-term care insurance to help clients ensure they are on track in each area.
Another way to address these types of issues is through regular, ongoing communication. One of our largest Fortune 500 clients sent email communications to every employee in 2010 on a different financial issue. Each email included quick and accessible resources on one specific topic that their employees could download and hold onto, including calculators, checklists and articles. This helped the company address the difficult topics in a more private way and in a way that allowed employees to learn at their convenience and as it related to their individual plans.
Mistake No. 3: Enabling Clients to Focus on Performance More Than Their Financial Goals
Most advisors enjoy investing, so they can easily find themselves getting caught up in clients’ portfolios. However, if you’re only looking at how the investments are performing, you might lose sight of the big picture—how the investments fit into your client’s overall life goals.
Though it’s important to seek out the best possible performing investments for your clients’ risk tolerance and time horizon (see Geoff Davey of FinaMetrica’s latest AdvisorOne blog on risk), be sure to keep in mind how they’ll be relevant to that client’s specific short- and long-term goals. It is in advisors’ best interests to get their clients focused on their overall financial goals more than their investment performance. If you focus on short-term results yourself, you inadvertently teach your clients to judge you on your short-term performance as opposed to longer-term performance, which is a much stronger indication of your success.
Avoid the temptation to put too much emphasis on investment performance even when the market is doing well, because your clients will then be inclined to do the same when the market is doing poorly. Try to always focus on how your clients’ portfolio is designed to achieve their goals and long-term growth as opposed to performance from quarter to quarter.
There are many rewards to being part of the financial services industry during a time like this, despite the pressures and challenges it poses. Advisors today have the unique ability to reshape the industry and grow it to become the profession our country and investors need it to be.
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