A financial advisor responds to 7 top client concerns
A financial advisor responds to 7 top client concerns
Educate your clients on the value of working with an advisor who practices proactive money management—stressing risk management in helping them reach their overall financial and investment goals.
Clients ask a lot of great questions, and with each year’s enhancements in technology and access to information, the questions only seem to keep getting better. However, there are questions I hear from clients and prospective clients that are relatively timeless and come up with great frequency. Here are seven of the most common (and important) questions I receive, along with my responses.
“I’m retiring in the next couple of years. Should I move more of my money to bonds?”
This question is probably one of my biggest pet peeves. It’s not too different from a nutritionist telling us that the healthiest way to eat is to stuff our faces with carbohydrates. (Don’t worry; this isn’t an article about healthy eating.)
Sticking with the food analogy, however, in the vast majority of cases when building a portfolio, stocks are typically going to be the main course. Bonds are the water that makes everything a little easier to swallow, and then you have investments such as commodities and currencies, which are the dragon fruit or habanero peppers that everyone seems to want to try but perhaps do not fully understand.
I believe in asset-class and sector rotation as opposed to static diversification. In fact, I sometimes call diversification “di-worse-ification,” and here’s why.
Let’s say we own 100 stocks in our portfolio and each is worth $1,000, creating a $100,000 portfolio. Let’s say one of those stocks is Microsoft (MSFT). Do you think MSFT is going to rise 100% in value in the next 12 months? No? I agree. But let’s say we do get a 100% rate of return (ROR) on MSFT between now and the end of the year. What would the return be in our overall portfolio?
Yes! Only 1%! Diversification is a good thing, but facts like these are ones we need to share with our clients. They need to understand that a few really good stock picks will not make their year. And, if passively allocated, when the market goes up, their portfolio will go up … and when the market goes down, so will their portfolio.
I think it is much more effective—in fact, imperative—to focus on the active management of asset classes and sectors, finding overall performance trends that will consistently add value to our clients’ portfolios.
But back to bonds. The bottom line here is that interest rates and bond prices are inversely related. As rates have fallen since the early 1980s, bond prices have risen.
That’s not to say that there aren’t floating-rate securities or Treasury inflation-protected bonds that can move higher in a rising interest-rate environment. However, it’s my belief that to safely make money in bonds at this point in our economic history, portfolio managers and advisors are going to need to be proactive, not passive.
Unlike the stock market, interest rates take a long, long time to bottom (and top, for that matter). As this bottoming process ends and rates start to rise, bond prices are going to suffer, especially at the long-end of the yield curve. This is why it’s frustrating when I hear this question—because so many investors have been taught to “just buy more bonds” when they get older.
The truth is, this: There are six asset classes and we’re only talking about one here. You can still make money in commodities, currencies, international stocks, and bonds, even when stocks and/or bonds are struggling here in the U.S. We need to be reminding our clients of this general inverse relationship between bond rates and prices and continue educating them on the pitfalls of blanket advice.
“Why did you buy XYZ investment, considering it just went down a few months later?” Or, “Why did you sell ABC investment? It went up after you sold it?”
This is a fun one. A client called me a few years ago, legitimately concerned, to ask, “Adam, you bought Buffalo Wild Wings (BWLD) and sold it just six weeks later after it went down. Why didn’t you wait for the price to come back first?”
My relationship with this person was pretty good, so I felt comfortable responding, “You know, after all these years of managing serious retirement dollars, I never really thought about it until now … but I should probably only buy the investments that go up.”
During the five awkward seconds of uncomfortable silence that followed, I worried that I may have offended this client, but then he started laughing and everything clicked.
Every time a proactive, tactical portfolio manager buys an investment, they already know where they want to sell it. So, if it goes down past our “sell point,” we walk away from the investment. We don’t treat it like a gambler in Vegas and “wait to get our money back before we sell it.” That’s a really good way to lose a lot of money.
Not every investment is going to go up in value. In fact, a good percentage of the buys may be losers. The trick is to keep those losers as small as humanly possible and let the winners carry the sailboat safely and steadily to and through retirement. Said another way, we put people in portfolios they need—not what they want. Many firms with passive strategies or those that focus on the “product of the day” are just looking to make a sale—but we’re not salespeople here. We’re going to invest clients’ money in the strategies that are best suited for them. Importantly, as with most reputable proactive money managers, the investments and models our clients own are literally the same things we own in our personal retirement portfolios.
“What does your historical performance look like? Have you beaten the market?”
Past performance is not an indication of future returns. There is no guarantee that the market will recover as quickly or as dramatically as it has at times in the past. The S&P 500 decline in 2000–2002 took years to recover, and by October 2007, the market was falling again. It would be five more years off the bottom (until 2013) before the S&P 500 again recaptured its 2000 high. The NASDAQ Composite did not recover fully for more than 15 years off the 2000 high.
I don’t watch a ton of golf, but how many people have ever hit a hole-in-one? It’s happened only 28 times at the Masters Tournament, ever!
Every time you open a piece of financial news or a magazine, you’re likely to see ads for mutual funds with unusually high performance. Think of these as often being “holes-in-one.” This is also one of the many reasons why we don’t recommend mutual funds at our office. Instead, we use a tactical, proactive approach to help our clients reach their goals in this game. Our goal isn’t to hit holes-in-one, although it’s what we’re aiming for. Rather, we want to first protect our clients’ money, avoiding aggressive shots, and playing the fairways, shooting for par.
In professional golf, one bad hole—one bad mistake—can destroy the entire round or even an entire tournament. The difference between a good and a bad round of golf is not how many good shots were made, it’s how you capitalized on those good shots and avoided making bad shots. Said another way, it is most often not just about how many birdies you make, but about how many bogeys you avoid. We see it the same way in helping clients manage their investments. Our objective is steady compounded growth over time, seeking to avoid the “blow-ups” that can derail a retirement portfolio.
“I hate paying taxes. Should I really sell XYZ investment, knowing that I’ll have to pay tax on the gains?”
I can’t count the number of times I’ve heard this question over the years. It’s usually a stock with a low cost basis that the client has inherited or received as a gift. The concern is that, if sold, the resulting sale will trigger a large capital gain.
One of my favorite responses to this question goes like this: “If you’re worried about paying capital-gains taxes, just hold on to the investment and stay in the market. If you hold on to it long enough, the market will take care of those gains. Then, you won’t have to pay any taxes!”
OK, it’s a little tongue-in-cheek, but you get the point. Let’s say you have a client who comes in for an introductory appointment, you gather all of the information you need to construct a financial plan, explain your unique, proactive portfolio-management process, and show them a comparison between what they’re paying now and what they’ll be paying your firm. You also give them a ton of advice on everything from their mortgage, life insurance, and tax planning, to their will, health-care directives, powers of attorney, and retirement planning. Then, you fill the gaps and advise them on an efficient strategy to get them from where they are now to where they need to be—to hopefully realize every single item on their bucket list.
Once it’s time to make investment recommendations, you recommend they put one-half of their net worth into one, individual stock. What would the client say to you? They’d probably think you’re crazy and find their way out of your office! But that’s essentially what clients are doing when they walk in with a highly concentrated stock position that they want to keep only to avoid the potential tax burden. We all know in this business that there are strategies to avoid these taxes and that the ridiculously high level of risk the client is taking may far surpass the supposed tax consequences.
What most people don’t understand is that the market can wipe out years (let me say that again … years) of portfolio growth in a matter of months. Our plan is first, and foremost, to avoid those losses, even if it means biting the bullet and potentially paying some taxes upfront. It also can mean selling an investment and then buying it again at a higher price than where we previously sold it.
At the end of the day, when clients hold on to investments for the wrong reasons, their future lifestyle is at risk. It’s our job to help educate and communicate these risks to them—so that we can assist them to and throughout retirement without their ever running out of money.
“What is the market going to do this year?”
While everyone who meets with us knows there is no crystal ball (not one that works, anyway), this question inevitably gets asked on multiple occasions throughout the year.
In my opinion, even with extensive research and the opinions we might hear from legendary investment figures, I don’t believe that any market data or indicator can provide a red flag going out further than six months. Even then, there are too many variables that can change in the blink of an eye, any of which can change the outcome of the market in any given year.
I like to bring things back to the financial plan. Call it boring, but that’s why people hire us. We like to ask them what their “family index” is. Rather than focusing on the S&P 500 Index or the Dow Jones Industrial Average, we want to focus on the most important index for that particular family—the ROR required to ensure they never run out of money.
Naturally, behind the scenes, we all have personal goals as advisors and portfolio managers of beating a benchmark. However, I’ve never had someone come into our office and say to me, “Adam, I don’t care about my retirement goals. I honestly don’t care about retirement or what happens to my wife and our money when I die. Even my kids—I don’t worry about them a bit. The only thing I care about is beating the S&P 500 every year.”
No one says this … ever! The point is, we want to complete a comprehensive financial plan for the client, taking into account their income, expenses, savings, pensions, Social Security, retirement assets, brokerage assets, trust assets, and anything else that applies. We figure out their required minimum ROR to get from now to retirement “on time,” and more importantly, to ensure they never, ever run out of money … regardless of inevitable future market crashes. This is the only truly important number—the ROR that is the client’s “family index.”
“This market has been going up forever, and I’m afraid that getting in now might not be a good idea. Do you think I should wait for the next crash, and then invest my fixed and cash assets?”
If you are a quarterback on a football field, your job is to move your team down the field and score points. Most football fans appreciate the fact that when you’re on offense, your job is to protect the football at all times. Sometimes, you drop back to pass the ball, all of your receivers are covered, and there’s nowhere to run. You must either throw the ball out of bounds or tuck in the ball and take the sack, even if it means a temporary loss.
If you panic because of the oncoming pass rush and try to force the ball into tight coverage, you stand a good chance of throwing an interception and losing possession of the ball altogether. While the sack is a short-term, temporary setback, you still maintain possession of the ball, which gives you the ability to continue advancing toward the end zone. If you throw an interception, suddenly you’re on defense and your ability to score is eliminated. To make matters even worse, when you eventually get the ball back, you may likely be in much worse field position with less time on the clock. Sound a lot like our clients’ retirement planning? I think it does.
The point is, we need to understand that protecting wealth is most important, and clients who are afraid of the market need to understand this crucial rule in the game of retirement planning. When we have the ball, we need to be cautious. And when we lose the ball (which will inevitably happen as the market starts to crash), we need to put different players (investments) on the field than the ones we had playing on the offensive side of the ball.
In the end, getting started with an investment program is a lot like jumping on a train that’s already moving. The most difficult part is that first, initial, anxiety-provoking leap. However, once you’re on the train, it only gets easier from there. When clients ask this question, we need to help them realize that we could get started with their financial plan, get their money invested, and, yes, the markets could decline in the short term. While they may have lost a little money, we would also have recommended starting to sell those investments as they broke down.
However, if we wait for a better time to leap, that time may never come. The markets could keep climbing, and we’d still be waiting for “the perfect time” to jump on the train. Meanwhile, the train has left the station and is miles down the track.
“Why should I pay a fee for a proactive money manager versus just putting it into a handful of index funds and just letting it be?”
If you had the option of taking two different airplanes from New York to Los Angeles, would you pick the one with the pilot or the one without? Most would choose the plane with the pilot. While the jet itself will take you from where you are now to your destination, there will be a fair amount of turbulence and rough weather along the way. While some may choose to forego the cost of a proactive money manager and/or financial planner, our job as our clients’ metaphorical pilot is to get them to their destination, and to do it safely!
Almost all of our current clients tell us that they receive more value than they originally imagined at the onset of our relationship. Still, however, there will be new clients who will ask many detailed questions about fees, which is perfectly fine. In response, I often ask them one question that puts it in perspective:
Do you believe in paying for professional insurance services for your second- and third-most valuable possessions: your house and your car? (Have you ever wondered why the savvy actuaries at companies providing auto or home loans require insurance coverage?)
While there is no pure “insurance” for investments, there is also an important role (and a cost) for professional risk management for your most valuable possession: your retirement portfolio.
If a prospective client is going to simply diversify a portfolio, buy, and passively hold on to the investments forever, we always like to nicely tell these folks that they should do it themselves. Think about it: Why would you pay someone 1% or more per year to buy a few index funds and hold on to them when you can do the same thing yourself, and for free? (If one doesn’t mind the fact that these index funds can’t get out of the market when it heads south.)
The point is, unless you just want someone to blame when the market crashes, you should probably implement passive investing on your own. I’ve personally found that most people (surprise!) do not enjoy it when the market inevitably enters another bear market and their portfolio suffers losses of 25% to 50%. I am passionate about demonstrating—from the start of any client relationship—the value we can bring in helping apply risk-management techniques for clients’ hard-earned retirement portfolios.
If “buy and hold” investing was a superior way to manage portfolios for the long term over proactive money management, that’s exactly what we would do at our office for clients. And it is what our firm’s advisors would follow for their own discretionary and retirement accounts.
But we don’t, for many good reasons. And we recommend that prospective clients hear our rationale and then decide for themselves if we are the right advisory firm for them.
Educate your clients on the value of being proactive in money management—and the merits of working through your firm with third-party investment professionals who have dedicated research teams, sophisticated models, and rule sets for active, risk-managed strategies.
One of the things we do as proactive money managers is select the appropriate investments for our clients based on their strength in the market, regardless of whether that strength is related to asset classes, sectors, or individual issues relative to their peer groups. However, what we do best is continually monitor market trends and reduce risk at times when risk levels are elevated. Doing so enhances our ability to avoid losses, first and foremost, all while customizing the portfolio to the needs of our clients and their carefully constructed, comprehensive financial plans.
The opinions expressed in this article are those of the author and do not necessarily represent the views of Proactive Advisor Magazine. Provided content is for overview and informational purposes only and is not intended and should not be relied upon as individualized tax, legal, fiduciary, or investment advice. Investing involves risk, which includes potential loss of principal. The use of asset allocation or diversification does not assure a profit or guarantee against a loss.
Adam Koos, CFP, is the president and portfolio manager at Libertas Wealth Management Group, Inc., located in Columbus, Ohio. Mr. Koos is a graduate of Ohio State University and has earned degrees in psychology and finance. He has been named one of Central Ohio’s “People to Know in Finance” by Columbus Business First. Mr. Koos founded Libertas Wealth Management in 2001, achieving local and national recognition for his firm. www.libertaswealth.com
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