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Six Conversations With Clients You Need to Have

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To be a successful financial advisor, you must have the diagnostic acuity of a physician, the perspicacity of an investigative reporter, the problem-solving skills of a psychologist — and, oh yes, the expertise to recommend appropriate investments.

In other words: The client isn’t a number, and you’re not a salesperson. Every individual in your book of business has a unique set of needs, goals and concerns. Therefore, to provide the best service, you must get to know each person multi-dimensionally.

Here are six critical conversations that can help advisors meet investing goals and save clients from making dumb, self-destructive decisions. According to our panel of distinguished financial services authorities, FAs’ smart questions hold the key.

 1. The Client’s Total Financial Picture

Take a holistic view to determine not only the amount of investable assets but liabilities and earning capacity too. “You should understand the client’s entire financial situation,” says Kent Smetters, a professor at the University of Pennsylvania’s Wharton School and a former U.S. Treasury deputy assistant secretary for economic policy. He is president of Veritat Advisors, headquartered in Philadelphia.

What makes the holistic approach challenging is that many affluent clients habitually “diversify” advisors, thus turning over assets to more than one FA. “The typical high net worth household has two-and-a-half advisors. This is serial polygamy and a reflection of mistrust,” says Timothy Noonan, managing director, Russell Investments, based in Seattle.

To help clients consolidate, Noonan, who spends lots of time advising advisors, says: “Show clients you’re not trying to sell them something but trying to solve the financial problem they’re worried about and figuring out a plan to help them have the highest lifestyle they can.”

Behavioral finance researcher Meir Statman, Glenn Klimek professor of finance at Santa Clara University and author of What Investors Really Want (McGraw-Hill, 2010), stresses that in this conversation, “it’s critical to understand how a client’s money is connected with their life. What’s the money for?”

To find out, develop the skill of effective questioning using a continuum approach that begins with open-ended, non-directive questions and drills down to pointed, directive ones. “Start broad, then narrow down topic by topic,” says Raphael Lapin, a Harvard-trained negotiation specialist and consultant to Fortune 500 companies and governments (as well as a contributor to Research). Based in Los Angeles, he is founder and principal of Conflict Management, Negotiation & Mediation.

“The first thing is identifying the subject of a conversation. The second is how to have that conversation. Begin with: ‘Tell me a little about why you’re here,’” says Lapin, author of Working with Difficult People (DK Publishing, 2009). “The more information you want from an individual, the more non-directive your questioning needs to be. Eventually move to questions about a specific asset.”

 2. The Type of Relationship the Client Wants

Using the doctor-advisor analogy, Statman points out: “The client knows where it hurts. It’s a matter of sharing that with the advisor and being honest enough to say, ‘This portfolio that you recommended may be [good] for somebody else but not for me.’ They may say that because they’re scared or they’d like to have more information, or ‘Explain it to me in math,’ or ‘Don’t bother me about math.’”

According to Jay Nagdeman, founder and president of Suasion Resources, a financial services marketing firm based in Roseland, N.J., “the most important thing to remember is that this is a mutual relationship and that both parties need to be satisfied. Many times advisors are in sales mode and forget this. But the advisor isn’t selling products or services; the advisor is selling trust.”

Nagdeman, author of The Professional’s Guide to Financial Services Marketing (Wiley, 2009), suggests that FAs pose deep questions like, “What was the best experience you’ve had with an advisor?” And, “What was the worst experience?”

Such a rigorous conversation is crucial, Lapin says, because “it sets up expectations at the beginning: You and the client are together crafting — in writing — a relationship in whatever way works for both of you. This helps to build trust upfront — in you and the process. Clients want advice, but you need to engage with them as a partner. They want to be very well heard and understood. Remember, it’s a conversation, not a monologue.”

3. How Much Money  the Client Expects  to Spend in Retirement

“This is an important conversation, but it isn’t being held on any meaningful scale,” notes Tim Noonan, author of Someday Rich: Planning for Sustainable Tomorrows Today (Wiley, 2012), co-written with Matt Smith. “The evolved conversation,” Noonan says, “is built around three questions: (1) What is the amount you think you’ll need to have the lifestyle you envision — and do you even know what that is? (2) What is the likelihood you’ll run out of money before you die? (3) How can you make sure each aspect of your nest egg is being optimized?”

A Russell consumer research study found that “people had a dominant fear they’re going to die broke. And anxiety about the planning process itself was preventing them from engaging in it,” Noonan says. “Even the term ‘retirement planning’ turns people off. [In contrast,] ‘lifestyle design’ excites them because it sounds groovy.”

Statman maintains that investors’ worst fear is essentially groundless since in reality, “retirees dip very little into their assets rather than exhaust them really fast. I’ve never seen a study that shows that people who lived a middle class life became reckless in retirement and spent themselves down to zero.”

The retirement-money conversation, Smetters contends, “is about really trying to understand what the client wants to achieve, then giving them the appropriate goal-based advice.”

What that means, Noonan says, “is determining how much they actually need, and creating a feasible spending plan.”

4. Investment Strategy and Importance of Diversification

“If you merely tell a client: ‘When one asset goes down, the other goes up,’” Statman notes, “you give the impression that they’ll never have losses. Typically, everything goes down; but they go down by different amounts. If you put all your money in one asset, you’ll either be the hero or the goat. But if you spread it around, you’ll be neither, and that mitigates losses.”

Nagdeman calls this conversation “risk assessment — trying to identify the risk parameters the client feels comfortable with. I know of an advisor,” he says, “who has a risk-sensitivity scale based on a number of what-if questions. They give him a good feel for the risk sensitivity of a new client.”

Smetters insists that clients really don’t know their risk tolerance or even what the term means. Rather, he says, “the advisor should be thinking about risk capacity and actually calculate it. That is: Can the client afford to take the risk they claim they’re willing to accept?”

Statman’s research has found that people who are overconfident in their investment ability also say they’re willing to take more risk. “So if the advisor asks only about risk tolerance,” he says, “they won’t be able to tell whether the client is really willing to take more risk or simply so stupid as to be overconfident in their ability to control risk.”

In general, however, Lapin sees the advisor-client relationship as a collaboration. “Many advisors like to tell clients: ‘This is what you should do.’ But nobody likes solutions imposed upon them, even if they’re good ones. Clients need to feel they’re being served some options from which they can make an informed choice.”

Noonan points to research showing that, three years after the global financial crisis, “consumers [still] believe the market system is rigged against them and regulators are out-to-lunch.”

Surprisingly, though, he says that “the more advisors focus on trying to explain things, the less successful the conversation will be. It needs to be the other way around: The advisor has to pull out of the investor what they’re trying to accomplish. The onus is on the advisor to persuade the investor that the decisions they’re making are aligned with getting them to the finish line.”

But certainly, many clients would rather avoid delving into detail. “They don’t want to understand how the car runs — all the nitty-gritty. They just want to know they have a mechanic — an advisor — they can trust,” Smetters says.

For Noonan’s part, reducing investors’ anxiety about long-term retirement planning is paramount. “Unless you do that, you can’t get clients to engage in a constructive way. You do it by assuring them that you have no higher interest than creating a sustainable future for them and have the technical know-how to bring that about.”

5. Rehearsing for a Sharp Market Decline

“It’s pretty much guaranteed that a significant market decline will happen at some point,” says Michael Kitces, a partner and director of research at Pinnacle Advisory Group, headquartered in Columbia, Md. When that occurs, “clients go into panic mode because it’s typically the first time they’ve been confronted with the issue. Having a conversation in the middle of a disaster about how to adjust is an absolutely horrible time because the client can make bad, rash decisions.”

To prevent that, Kitces, who writes the financial blog Nerd’s Eye View (, urges advisors to hold a conversation to create a plan of action that is an integral part of the overall financial plan. “Clients will need to make some decisions and tradeoffs: ‘What’s more important to you if you can’t afford everything?’” In the rehearsal, they may opt, for example, to cut spending or save more or postpone retirement.

Given that investing is famously fraught with emotion, Nagdeman makes this observation: “If you’re able to set parameters prior to [a steep decline], you’re minimizing the emotional investment and thinking with the head instead of the heart.”

Furthermore, Statman recommends getting a fix on the client’s basic attitude early on. “If they tell you they see this country going down, down, down, you know they’re probably overly pessimistic. If they say the country is still the captain on the hill, they’re excessively optimistic; and you have to serve as the rudder to straighten them out.”

It’s vital to have a rehearsal-for-a-crash conversation and to memorialize it in a document, Lapin says. But what if the client simply refuses to talk about even the potential for a severe drop? Ask them: “‘What is your worst concern about discussing this now?’ Try to get some information as to what their fear is. Keep probing,” Lapin says, “because this conversation will serve the advisor and client well when things don’t go the way that is anticipated.”

The time to have such a discussion is when things are okay. “Go through the exercise and rehearse exactly what the client would do,” Kitces says. “Then, when a decline does occur, everything will be known ahead of time and you’ll have a bona fide plan to execute. If a client utterly cannot stand to have this conversation, stop being their advisor.”

6. Is the Investment Strategy Meeting Client Needs?

“Here you’re looking at the advisor’s value proposition — their raison d’etre,” Nagdeman says. “If you’re not continually watching a client’s holdings, you’re not doing your job. This is where an advisor proves their worth. If an earnings report is [poor] and you’re concerned about an investment, that’s when you should have this conversation — not wait until the quarterly review.”

At the start, though, work out an agreement with the client as to how often you’ll have a “check-up” conversation. Use this as a guide; renegotiate later, if necessary. Both investors and retirement plans need to be flexible: Who knows everything that the future holds? But suppose a client announces suddenly that they want to invest more aggressively, when this is clearly not in their best interest?

“You can be incredibly influential through questioning rather than stating and declaring,” Lapin says. “With subtle questioning, the advisor can help the client understand the risk involved and the need to have a conversation about the pros and cons of risks, costs and benefits.”

On the other hand, Statman recommends a far different tack: being blunt. This is the way, he says, that would sound: “I’ve helped you by dividing your money into two pots — one for not being poor, one for being rich. If you take money from the not-being-poor pot and put it into the getting-rich pot with a risky investment that loses value, you’re going to be plunged into poverty. This isn’t a reasonable investment, and I would not stand by you. Maybe you should look for another advisor.”


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