By far, the hardest part of managing other people’s money is not just the research that goes into building a portfolio or picking the specific assets, but the psychology of how a client feels relative to the current marketplace and their specific goals, which are not always realistic. Of course, as a fiduciary, there is a lot of information needed from a client before recommending portfolio allocations and assets. We all wish we could easily fulfill most clients’ request to “just make money, but don’t lose a dime.” Unfortunately, as professionals, we realize that has never been possible, nor will it ever be. However, what I have learned is that the more education you provide a client about the complexity and nuances of investing, the better they become not only as investors but as clients.
Therefore, below are some thoughts you might want to implement with new clients or review with current ones.
1. Investment objectives—What are the client’s overall investment goals, dreams, abilities and portfolio structure—assuming they have one? Obviously it’s important to know if clients are high-net-worth clients, what kind of liquid net worth they have, what their income levels are, investing time horizon, retirement income needs, overall strategy, and even preconceived return assumptions. Without discussing this kind of in-depth information with a client, matching their goals and objectives to the portfolio construction can easily become misguided.
2. Investing principles—these are fundamental or general truth or law; sometimes they are an underlying theory or belief. What does the client believe are the best investment vehicles? Mutual funds, exchange-traded funds, individual stocks/bonds, or the newest, often fictitious guaranteed products that are one-size-fits-all? This discussion provides a great opportunity to understand a client’s preconceived ideas, as well as the opportunity for you to educate them on what vehicles are best for them, based on the big picture and their specific financial goals.
3. Investing strategies—What does the client understand about investment strategy and what is their plan of attack to guide their investment decisions? What are their thoughts about market timing, buy and hold, asset allocation, passive or active investing, socially responsible investing, tax-free vs. taxable structures, or does the client have 100% confidence in a specific industry/sector? While most investors don’t fully understand the complexities of using different strategies, hopefully such a discussion will increase their appreciation for the advice you provide.