Clients are From Venus, Advisers are From Mars

I recently had coffee with a friend, and she told me that she was considering changing financial advisers. As we were talking it brought to mind many of the frustrations I had managing a financial advisory business. Its very hard to get clients and advisers on the same page.

My friend listed two main concerns. First she said she didn’t think her investments were performing well. They certainly weren’t beating the market, and the investments she manages herself in her 401(k) had performed better. Second, she didn’t feel like she had a good understanding of whether she and her husband were on track to meet their financial goals. Both of these issues are the result of the adviser failing to clearly communicate with his client. I guarantee you, that if my friend does change advisers, her current adviser will be totally shocked.

As investors seeking help there is all sorts of information available to us to help us select an adviser. One piece of advice that I have heard consistently throughout the years is that if you are paying for advice, your investment returns should be better than the market, at least by enough to cover the adviser’s fees. This sounds very reasonable and logical, and I can see your heads nodding up and down.

Unfortunately this little gem fails to define the market and fails to take into account the risk that is being taken in order to get the return. Clients generally define the market as the S&P 500 or the Dow Jones Industrial Average, which are tracked daily in the news. Most clients shouldn’t have all of their investments in one of these indices, because, in a play on the immortal words of Jack Nicholson in A Few Good Men, “you can’t handle the risk!”. US stock market returns are very volatile, and investors with heavy doses of stock in their portfolio are highly likely to abandon their investments at the very worst time, usually the bottom of the market, regardless of whether they are working with an adviser.

Advisers know this and don’t build client portfolios to beat the S&P 500. They create diversified portfolios with cash, bonds, international stocks and a variety of other investment categories, with the goal of meeting the client’s long term investment return requirements, while minimizing the risk of the overall portfolio to the extent possible. This increases the client’s likelihood of sticking with their investment strategy. Managing the risk, narrows the range of returns, reducing the level of potential negative and positive returns. So the only time the portfolio can beat the market is if the market is declining.

Unfortunately, clients don’t often leave their adviser’s office with this idea, and if they do, they don’t hold onto it for very long. If the market is up by 10%, and their portfolio is only up by 7%, they feel they are not getting their money’s worth. If they have investments away from their adviser, its easy to fall into the trap of comparing the returns without comparing the risk. Advisers do a poor job of framing their investment strategy and results in context with their clients objectives. That brings me to my friend’s second complaint.

When a client enters a new relationship with an adviser, a lot of work goes into understanding the client’s current financial situation and creating the perfect portfolio to meet the client’s objectives. With this information, the adviser brings the full resources of her firm to bear on managing the investments. Once things are in place, all of the relationship’s attention becomes focused on the investments. The objectives and where the client’s investments sit relative to the objectives are rarely discussed. The adviser manages, feeling good that the portfolio is performing as she intended, while the client wonders whether she is going to be able to retire.

Advisers don’t ask often enough about changes in their client’s situation or goals, and clients don’t often bring them up. Advisers could reduce their client’s anxiety by more frequently providing detailed information showing whether the client is on track, and if any adjustments need to be made either in the investments or on the client’s side. But as a client, you can take a more active role in your relationship. Here are a few tips for getting the most out of your relationship with your adviser.

  1. Ask your adviser to provide a projection of how your portfolio is expected to perform relative to your goals on a regular basis. Annually is a good frequency.
  2. Make sure your adviser knows about changes in your situation or goals. Will you be able to save more or less? Do you have new obligations, like a mortgage on a vacation home? Do you need to help your children or elderly parents with expenses? Your adviser needs to know about these changes and potentially redo your projection or develop a new investment strategy. The two of you need to discuss options together.
  3. Keep in mind that your portfolio can deliver safety, income or growth. Emphasizing one naturally sacrifices the other two. If your portfolio is meeting your objectives, you are in good shape and whether it is beating the market is irrelevant.

Working with an adviser is a great way to secure your financial goals. Your adviser has the expertise and resources to keep you on track, and that is why you are paying him. But your relationship with your adviser needs strong communication, just like any other relationship. Working from a position of understanding will reduce your anxiety and help your adviser provide his best service.

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