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