Educating clients in a changing financial environment

Daniel Loy, Financial Advisor • Milpitas, CA
LTK Wealth Management • Independent Financial Group, LLC
Read full biography below

Proactive Advisor Magazine: Daniel, how do you see your role in working with clients?

The role of the financial advisor is critical to the long-term financial success of millions of investors. As people plan for and face retirement, they are confronting an uncertain and shifting investing landscape. Yet certain fundamental principles for building strong, diversified portfolios remain the same. With today’s market challenges and regulatory uncertainty in mind, we are focusing on providing solutions for basic, yet important client needs, such as

• educating clients on the challenges and opportunities presented in what has become the “new normal” investing environment;
• guidance and recommendations to both formulate and work toward achieving their financial goals; and
• exploring alternative portfolio approaches to preserve wealth while seeking opportunities for growth and income.

One of the most important functions of a financial advisor, I believe, is to strive to fully understand the financial situations of their clients and what is truly important to the future of their families. This means not only diving deep into the nuts and bolts of their current finances, but also understanding their outlook on risk and what they want to achieve in the future.

A goal must be defined and refined, otherwise progress is purely happenstance. Most investors have a general idea of their investment goals but have difficulty quantifying a realistic target in relation to historical market behavior. We have adopted a process and a set of tools designed to establish and maintain realistic investor expectations over the life of their portfolios, not expectations based on market benchmarks. This way they can track their progress toward their personal investment goals and hold their advisor, and the money managers being used, accountable for their portfolios’ performance.

You appear frequently on Chinese-language radio programs. What are some of the large themes you speak about on the air and with clients?

One of the most common mantras put forward by the financial industry is some variation of the phrase “past performance is not indicative of future results.” Even though this is said all of the time in financial disclosures, it seems many financial advisors do not acknowledge the reality of this concept in constructing client portfolios. Advisors have historically been dependent on looking at the risk-return assumptions of the past, even when we have seen how they have not held up twice already in this century.

If financial advisors use a Monte Carlo tool, for example, they are essentially using historical asset returns in their financial-planning calculations. As a result, they might be presenting clients with an overly rosy scenario for their retirement plans. In this environment of ultra-low global interest rates, volatile markets, and sluggish economic growth, financial advisors should have serious conversations with clients about their expectations. I think it is prudent to apply realistic expected rates of return and inflation for any financial plans as we look toward the future.

The 60/40 stock-and-bond portfolio model, which has served us well for many decades, is close to irrelevance. To generate reasonable returns, portfolios now need to incorporate different asset classes and investment approaches. These new asset classes will have different benefits and risks from what many investors, advisors, and regulators have seen before. This different approach, and a change to the way portfolios have been constructed for decades, represents in some ways a new kind of risk, but one that can be managed and mitigated through thorough education on the part of the advisor community and especially for our clients.

“Today’s environment calls for adjusting traditional approaches to investing. … We now can bring new, proactive investment approaches to everyday clients.”

What is your approach in this planning and investment environment?

One of my favorite quotes is from former president John F. Kennedy, who said, “Change is the law of life. And those who look only to the past or present are certain to miss the future.”

Today’s environment calls for adjusting traditional approaches to investing. Having access to high-quality and institutional-grade alternatives is so crucial for investors. It is prudent for financial advisors to consider alternative ways of investing that have been effectively adopted by large institutions and successful university endowments over the past several decades. We now can bring new, proactive investment approaches to everyday clients, techniques that have previously been the province of institutions or high-net-worth investors.

Traditional asset allocation, to my way of thinking, is a thing of the past, as is buy-and-hold investing with arbitrary adjustments and interval rebalancing. Portfolios can be effectively managed, I believe, both strategically and tactically. Understanding behavioral finance and applying its principles when working with clients is critical. Clients can become better stewards of their financial future when they are not operating under stress and making irrational financial decisions driven by emotion. Therefore, I think risk management within professionally managed strategies goes a long way to helping people stay with an investment plan for the long term.

I think it is also important to follow these key financial and investment planning steps:

• Creating a financial plan that addresses all aspects of a client’s financial well-being.
• Constructing a suitable portfolio based on his or her unique objectives, risk tolerance, and time horizon.
• Charting the ongoing progress toward achieving client goals.
• Staying abreast of economic and investment trends that may affect a portfolio and making changes as needed.

Talk about your work with the Chinese-American community.

I have clients of many different ethnicities and backgrounds, but the majority of my clients are Chinese-Americans. I am deeply involved with the Chinese-American community, both as a financial advisor and personally.

My clients, overall, are hard-working, responsible with their money, value education very highly, and are family-oriented. They tend to be conservative in their outlook on investments and wish to plan for a stable economic future for their family.

These are important values that I share, and I think that allows me to relate well to clients coming from this background. One of the opportunities I see often with the community is the need for financial education. In the San Francisco area, there is a great deal of Chinese-language media, and I think there are many potentially misleading messages about financial services and products.

See Related Article: Not all investment returns are created equal

On the radio programs I appear on, I try to convey a straightforward message about the need for careful and comprehensive financial planning. I also speak about today’s financial and economic environment. I believe the radio programs have been very well-received and perform a service for the community, in addition to increasing my visibility as a financial advisor.

My presentations on the air provide important financial education concerning the fundamental principles of building strong, diversified portfolios that place a priority on risk management. Many of the messages people hear elsewhere are about buying specific financial products. I do not take any position regarding a specific financial product or service—that is totally dependent on the needs of the individual and their family. That is one of the important core points I try to make on the radio programs: the need for personalized financial and investment planning.

When you are working with a client, how do you talk about your investment planning philosophy?

I ask questions and listen carefully to the responses. I then follow up with more questions. As we move through the process of determining their goals and objectives, risk tolerance, and time horizon, we will start building an investment plan that can conservatively meet their long-term needs.

There is no cookie-cutter formula, and each client is different. I communicate that customization message clearly to clients, and I believe they appreciate that they are receiving a personalized financial and investment plan. I explain that we have access to sophisticated financial strategies that are professionally managed by investment experts with many years of experience.

We can consider a very wide range of strategies and products, including alternative strategies, that can be blended together in a holistic way for each client. Clients need to be confident that their portfolios are diversified and managed in a way that is consistent with their risk tolerance. I explain various strategic investment options and try to set up realistic shared expectations regarding performance and returns. This is a partnership, and I want my clients to be vested in the decision-making. I am hopeful they view me as a financial advisor who is constantly striving to make their lives better and one who is working to provide a solid long-term investment program.