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October 07, 2013 at 09:17 AM
In last week’s post, we discussed how easy it is to reach conclusions that aren’t always rooted in fact. This truth holds great influence on the broader category of expectations because all of us have beliefs which we hold to be true even though we’ve learned that past beliefs were later found to be false. That’s just a part of life. Hence, it’s vital that we, as advisors, are in agreement with our clients in terms of what we do for them, how we do it and the possible outcomes we should expect.
To achieve this, each of us should develop our own basket of beliefs and convey them to our clients. The goal is to create realistic expectations that our clients will adopt. Here are a few things I am doing in my practice in this area.
As mentioned in a previous post, unmet expectations are the number one reason clients leave their advisor. If the client’s expectation is reasonable, if it has been communicated to the advisor, and if the advisor continues to fall short, then the client would be justified in leaving.
So let’s look at portfolio management and how we can help clients understand what to expect. Let’s begin with a question. How much of a portfolio’s variance is due to its allocation to stocks? For example, if stocks comprise 100% of a portfolio, then 100% of the portfolio’s variability would be attributable to stocks. However, as the percentage of stocks declines (the remainder of which is invested in bonds for this argument), the degree that a portfolio fluctuates also declines. But stocks’ contribution to a portfolio’s variance does not decline in sync with its allocation.
