Clients understand volatility—except when it happens
Clients understand volatility—except when it happens

For financial advisors, understanding core financial concepts such as variance, portfolio volatility, and systematic risk is one thing. Reckoning with their psychological effects on clients is another.


- First, ask the client to very specifically outline their current concerns. Is it an isolated aspect of their portfolio that is troubling them, overall portfolio performance, or an undefined anxiety about the market based on something they read or heard? How long has this been going on and what time frame are they referring to? Many times, their concern will be something that, when examined deeply and in context, is not as threatening as it might have originally appeared.
- Review again with the client their financial plan objectives and how they relate to their overall life goals. Ask them the critical question point-blank: “Are you still on track to meeting your long-term financial and investment objectives?” With a well-constructed financial and investment plan that was developed with the client’s risk tolerance at the forefront, the answer should undoubtedly be a calming “yes.”
- Ask the client to examine with you the rationale and assumptions that led to their original risk-tolerance assessment. If they, for example, said they could tolerate up to a 15% drawdown, why are they upset now with a 10% drawdown? Examine in concert with them whether their risk profile should be adjusted, leading to an overall different portfolio construction framework for the future.
- Have a frank discussion about the trade-offs of different types of portfolio allocations, the depth of exposure to equity markets, and the use of buy-and-hold passive strategies versus more active, risk-managed strategies. Would this client be more comfortable with a less-volatile portfolio construction, understanding that the consequence might be some “underperformance” versus the major market benchmarks in times of roaring bull markets? However, they must understand this is importantly counterbalanced through the use of strategies meant to mitigate the worst effects of bear markets.

Richard Lehman is the founder/CEO of Alt Investing 2.0 and an adjunct finance professor at both UC Berkeley Extension and UCLA Extension. He specializes in behavioral finance and alternative investments, and has authored three books. He has more than 30 years of experience in financial services, working for major Wall Street firms, banks, and financial-data companies.

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