Educating Clients: How Advisors Can Go From Good to Outstanding

Being a good financial advisor requires mastery of a wide range of technical skills. Being a great financial advisor requires having skills as a counselor and psychologist. Being an outstanding financial advisor requires developing your skills as a teacher. Here’s why.

The job of a financial advisor is to help each client get from Point A (where they are today) to Point B (where they want/need to be at some point in the future). The question is always how to maximize the chance that the client will arrive safely and securely at Point B.

When I first entered the financial services industry, many moons ago, the focus was squarely on the technical aspects of this journey. Advisors used their financial planning and investment skills to define and plot the course from Point A to Point B. The industry provided no shortage of financial planning tools and investment products to help with that effort.

Later, the focus broadened to include another dimension of the problem. Supporting clients emotionally and coaxing them to do the right thing has always been part of the job. But our understanding of the importance and complexity of that aspect of advising clients changed when research from the world of behavioral finance entered the mainstream. 

Soon we were awash in new jargon that labeled each quirk in the vast inventory of our financial decision-making dysfunctions. Concepts like “mental accounting,” “hindsight bias” and “prospect theory” brought us face-to-face with our profound ignorance about what was really going on in the heads of our clients.

A tsunami of articles, papers and presentations familiarized us with the basic concepts of behavioral finance, but left us unsure about what, exactly, to do with this information. We were generally sensitized to the need to explore our clients’ attitudes and feelings, but were given little guidance in how to do it effectively or what to do with the insights we gleaned.

One exception is the area of risk tolerance. A host of service providers emerged with products that purport to help us measure the risk tolerance of our clients. In developing a strategy to achieve a client’s long-term return goals it is certainly important to understand the client’s level of comfort with risk-taking. But what should you do when there is a significant gap between a client’s need to take risk and their comfort in doing so?

Here’s the dilemma. Say you have a client that has done a poor job of saving over the years.  The client has no choice but to be aggressive in their investment strategy if he is to have any hope of meeting his minimum acceptable return goals. But what if his tolerance for risk is very low?  Do you ignore the client’s discomfort with risk-taking and hope he doesn’t spin off the track when his aggressive portfolio hits a patch of volatility? Or do you dial down the portfolio in favor of a smoother ride, thus condemning him to a future sub-standard lifestyle?