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Financial Planning > Behavioral Finance

4 Reasons Clients Need You Now

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I have to admit that when editor Jamie Green asked me to write something about what advisors should be telling their clients these days, I was at a bit of loss to come up with something that hadn’t been covered ad nauseam every seven or so years at least as far back as the Arab Oil Embargo in 1977. It’s true that the challenges have varied widely over the years. Yet the current stream of bad news—increasing market volatility, China going down the tubes, the EU threatened on both financial and immigration fronts, Russia flexing its military muscles around the globe, oil price volatility and the Iran nuclear deal, to name but a few—appears to be particularly troublesome. 

Still, the traditional advisory litany of reminding clients of previous discussions about how markets tend to go up and down, but historically even out to track upward, managing risk through diversified, custom-allocated portfolios, and regularly buying low and selling high through rebalancing, appeared to once again be the client conversation du jour.

But upon reflection, it occurs to me that perhaps there is another dimension to client conversations that is frequently overlooked, especially during trying times such as these: one that speaks to clients’ understanding, rather than their psyche. 

As I’ve written many times, I’ve come to believe that a financial advisor’s job is to protect clients from themselves (succumbing to greed and fear in their investment decisions, and procrastination in their saving decisions), from the financial service industry and the financial media, by extension. Once again, I’m not saying that everyone in the financial services is a bad actor; but, as we all know, there are powerful financial incentives to put their own interests ahead of the clients’, and some folks can’t seem to be able to resist the temptation.

Now, the traditional client/advisor communications (described above) are usually effective in saving clients from their inclination to buy high and sell low. But in my experience, the biggest reason that retail investors need to be protected from the financial services industry is because they don’t understand how it really works.

And while most advisors do (I say “most” because it’s my observation that it takes an advisor between 5 years and 10 years of industry experience to figure out what’s really going on), they rarely make a formal effort to transfer this insight to their clients—which is a shame, as this understanding is the real key to financial success.

If I were a financial advisor, here’s what I’d be telling my clients these days, in addition to the “stay the course” speech: 

  1. Despite what you hear in the media, no one can time the markets. Okay, there may be a few folks who really do seem to have gift for picking stock and/or market direction. But do you really think that you could hire one of them for 1% (or whatever) of your investment portfolio? Those folks run hedge funds, and/or get paid a lot of money by very rich people for their advice. Most end up managing their own money. But one thing they don’t do is give their insights away for free on TV or in Money magazine—or over the phone to brokerage clients.

    So you can pony up $195,000 or so for one Berkshire Hathaway A share, and get Warren Buffet’s market wisdom, or we can continue to take what the market gives us, investing for the long term and keeping risks as low as possible.

  2. The retail financial services industry does not make money on its investments. Their profits come from fees and commissions paid by clients (and fees paid by mutual funds and insurance companies to sell their products to clients). Consequently, the industry has a big incentive to sell you expensive products as often as possible. And some of them are very good at coming up with convincing “reasons” to do so. Over time, the biggest drain on your investment portfolio isn’t market fluctuations (assuming you can avoid selling when your portfolio is down): it’s ongoing high fees and expenses, year after year.

    Our job is to get you the investments you need, for the lowest possible prices—and help you to stay invested, even when friends and family are panicking and selling. Remember, when your portfolio goes down, we make less too: we are in this for the long haul with you.

  3. The financial services industry wants you to take on more risk. In addition to retail clients, big brokerage firms work with very wealthy clients, too, such as pension funds. They are managed by very sophisticated investors, who are constantly trying to increase their returns while reducing their risk of losses. To do that, they sell off stocks, or funds, they deem to be too risky. But if they sell risky stocks/funds, someone has to buy them. It’s the brokerage firm’s job to find those buyers, who are usually retail investors just like you, or mutual funds that will be bought by investors like you.

    Our job is to keep your risk as low as you need it to be, and not get tricked into buying riskier investments.

  4. The financial services industry does not work for you. Stock brokers work for their brokerage firm; insurance agents work for their insurance companies. Even mutual fund managers work for their fund company. Therefore, they are legally required to work in the best interest of their employers, not their clients. Some of them do try to work in their clients’ best interests, but as we have noted above, there can be large financial incentives to do otherwise. 

    In contrast, independent advisory firms, such as this one, and their employees have only one duty: to act in the best interest of our clients. And we use our knowledge of investments, the markets and the financial services industry to do just that.

    During volatile markets and economies such as we have now, we work to keep your investment expenses as low, and your risks as low as possible and still achieve your long-term financial goals. We’ll also work with you to adjust your portfolio risk levels (and your goals) to levels with which you are comfortable. 

Or something like that.

The point is that it’s exactly times like these people really need a financial advisor. So it’s not a bad idea to help them understand why.