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Portfolio > Portfolio Construction

A counterintuitive way to keep clients happier

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Advisors typically begin client relationships with a focus return on investment but a new white paper argues that, paradoxically, an emphasis on risk is the surer path to keeping clients happy and winning over new prospects.

The essential problem, according to the paper by Riskalyze, is that while clients seek out advisors because they’re looking for a return on their investment, advisors who cater to that interest in ROI end up setting up expectations that no advisor can ever truly meet.

“Our industry typically focuses on the performance of a portfolio based on the average — a tactic that all but guarantees failure — leading to countless hours of phone calls and meetings with worried or unhappy clients that could have been avoided simply by setting better expectations up front,” the white paper states.

Auburn, California-based Riskalyze, whose questionnaires advisors use to generate a “risk number” that aligns portfolios with risk preferences, argues that advisors and their clients are mathematically doomed if the expectation is to achieve some vaunted average return.

“Unless you are invested completely in bonds, it is unlikely for the returns on a portfolio to be within even 5 percent of its average,” says the white paper, along with an accompanying table showing poor prospects of nearing average portfolio returns based on varying standard deviation scenarios.

The result is likely to be mutually unwanted “talk me off of the ledge” conversations during market downturns.

The white paper is not shy about explaining the advantages of its author’s product to sidestep the problem.

The Riskalyze questionnaire has become a popular tool among a segment of advisors as a means of generating a “risk number” that lets clients quickly visualize whether their current portfolio matches or fails to match their risk preferences.

As opposed to products that are based on either psychological testing or age-based stereotypes, Riskalyze’s quantitative based questions use the actual dollar amounts the client has to invest.

The client then specifies what percentage he is willing to lose (say 13 percent) over a six-month period in order to gain the chance to make a certain amount (say 20 percent) over the same time period.

Clients can dial up or down until they get the level of risk they are comfortable with, and an advisor can use the same software to devise a portfolio that exactly matches that individual client’s risk preference.

The client can then be shown a portfolio with a 95 percent probability of staying within the client’s preferred risk range, but more importantly, has been educated at the onboarding stage as to what kind of lows and highs are normal for a portfolio of that risk level.

“If the portfolio is down 4 percent and they know that it can be normal for the portfolio to be down 13 percent, the client will not call you with worries about their portfolio.”

Similarly when markets are going gangbusters with 30 percent returns, but that same client knows his portfolio is set to achieve returns up to 20 percent, advisors can avoid angry accusations of underperformance.

The advisor saves time on contentious phone calls and can show clients their portfolio is on track.

But above all, argues the Riskalyze white paper, the advisor who takes this risk-based approach to setting expectations avoids the untenable position of starting client relationships with idle talk of average returns of 8 percent per year.

Because most clients are not that financially sophisticated, they hear discussion of averages as “this portfolio will make 8 percent per year.”

Apart from the advantages of setting expectations that an advisor can meet and thus avoiding client unhappiness, the Riskalyze paper says its risk-based approach serves also as a sales tool because its questionnaire can “show prospective clients that they are invested wrong — and how you will help them invest right.”

See also:

The secret sauce of successful firms

Referrals revisited


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