In this article, published in the April 2010 issue of Financial Advisor Magazine, I discuss how the days of computer-generated multicolored pie charts being well-received by the investor are over.
April 16, 2010
Take Back Money Management
Financial advisors should spend less time hand-holding — and more time preserving clients’ assets — before the next big correction.
By Ric Lager
Can “knowing” your firm’s assets and their purpose be more important than “knowing” your clients?
After historic stock market losses in 2008, many advisors spent just as much time restoring the emotional damage delivered to clients from the downswing as they did repairing the financial destruction their portfolios encountered.
In today’s environment, a traditional hand-holding approach is not strong enough to mend current client relationships. More time needs to be spent by the current generation of financial advisors learning the tools critical to preserve their clients’ assets before the next big correction. In addition, less time needs to be spent on managing the client relationship and giving money away to third party managers who always think it is a great day to be 100 percent invested. Going forward, advisors need to articulate a logical, organized and disciplined risk management plan to each client they currently represent and every prospect they ever meet.
What Do Investors Really Need?
The days of computer-generated multicolored pie charts being well-received by the investor are over. While these charts explained financial investments, risks and asset allocation in an easy-to-understand way, we have come to learn they do little to educate the investor about how their portfolio needs to be managed to survive in this difficult market environment.
The majority of investors most likely assume that between the advisor managing their money and the third-party ETF/mutual fund/variable annuity manager that the advisor selects, at least one of the professionals has a game plan for when to buy and sell. The scary truth is many don’t. Today’s investor needs to be counseled as to what a logical and disciplined risk management plan is; something the typical computer-generated investment allocation model will not provide.
Can a graph truly answer questions?
Investors always remember asset losses much longer than they remember gains. No amount of goodwill built when the market is rising will ever be enough to keep the same clients happy the next time there is a 10% correction or worse.
Skills Advisors Need To Be Successful
Financial advisors need to tell clients that the era of being their friend is over. They must find the confidence to take full control of their risk-management decisions and make wise and profitable moves for their clients, even when it goes against the psychology of the investor. The current and previous two generations of advisors may find this difficult, considering most have only known the “relationship management” approaches taught to them by their mentors, legacy firms or by trial and error from their own practice management experiences.
A majority of advisors managing portfolios have never been trained by the firms they work for to make decisions on their own. Many miss their best chance (and sometimes the only one) to preserve their clients’ assets when a correction or steep decline comes knocking on Wall Street’s door.
After the last 18 or so months in the markets, my hope is that advisors realize that the approach of yesteryear no longer has a pulse and the chance of it helping him or her to gain new clients (to replace the ones likely lost) is as good as winning the Power Ball.
The Importance Of Money Management
The control of clients’ investments—and the advisory fee income that comes from those assets—can no longer be given away to third-party managers and mutual fund managers. The market risk-management decision-making must be taken back by the advisor.
The last 10 years of long-term investing in the U.S. market have provided no investment returns whatsoever for investors. Most of the advice financial advisors were given by third-party investment managers is worth as much as this piece of paper you’re reading right now. More so, a money market rate of return in client accounts over the last 10 years would have given you more referrals than you could possibly handle today.
The future economic climate is sure to be as hard, if not harder, for financial advisors to navigate for their clients. I would hate to risk my current client relationships, or my business career, on the chance that the markets will perform better over the next decade. What about you?
Ric Lager is founder of Lager & Co, co-creator of the No More Pies! investment series for advisors and author of Forget the Pie: Recipe for a Healthier 401(k). No More Pies provides a call to action for advisors who want to rethink their investment process, reduce their reliance on outside money managers and improve client retention. The seminar also presents a road-map for advisors to take a hands-on approach with their practice. For more information on Ric Lager and No More Pies, please visit www.nomorepies.net.
Here is the link to the article on the Financial Advisor magazine site.
