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Every advisor I know (including me when I was in the business) has one “problem client” with whom you don’t see eye to eye over investment performance. This issue is widespread enough to be considered an epidemic in the advisor community.
Before one of my webinars, I asked participants: “What is the #1 frustration you have when talking to your clients about risk?” The #1 answer (by a landslide) from a pool of over 200 advisors:
Clients want high returns and low risk
They just don’t get it, do they? Or, is it the advisors themselves whose understanding of risk needs to be improved? Either way, it needs to be addressed.
How do you reach people on this issue? What words do you use?
Here are my suggestions for how to respond to a client who stubbornly refuses to conceptualize the relationship between risk and return.
The words to use
You may not use this exact method of measurement, but the following examples reflect how to communicate risk clearly. They are adapted from a webinar I held with Aaron Klein of Riskalyze (replay here). Riskalyze uses a 1 to 99 risk score and presents the client’s risk tolerance like a speed limit sign. In its system, every client has a risk number that establishes how much risk they can handle (“Risk 45”) as in the following examples:
Example one
Say to the client:
Your risk score is a Risk 45. I can give you a Risk 78 that has a lot more return. But you’re going to have to accept the risk, the downside potential that the Risk 78 had in a year like 2008.
That creates a really interesting situation that Aaron calls the “ACAT for a moment” opportunity. You can see it through this analogy:
- I want to drive 45 miles per hour. That is what I am comfortable with.
- It would be way faster to drive 78 miles an hour. That would make me uncomfortable.
Example two
Let’s say your client is a little stubborn, or they don’t grasp what you said in the first option. Trying saying to the client:
You said you’re a Risk 45. Your risk score was 45. You want to drive 45 miles per hour.
We could drive 78 miles per hour together but look at this downside risk number, in dollars, for your portfolio. You told me that you were comfortable watching $30,000 (hypothetically – not a real number) go “poof” over the next six months. Well, you’re going to have to be comfortable with $75k going “poof” if we invest like a Risk 78.
Example three
But what if, after hearing examples one and two, they decide to move to a Risk 78?
Say to the client:
So if we move you to a Risk 78 and six months from today if we’re down that $75,000, that is the worst time in the world for you to sell. We’re going to have to agree together that this would be normal behavior for your portfolio. So if we’re down $75,000 six months from now, you’re going to say that it’s okay to stay invested.
Let’s say we’re sitting here in six months and you open your account statement and see $75,000 went “poof” and the account is $75,000 less than what it was today. Will you say, “that’s okay, let’s stay invested” at the point when you saw your $75,000 go “poof” in front of your eyes?
Why it works
Here’s what I like about the wording in these options:
- Uses a catchy phrase (“Risk 45”) with tangible numbers rather than categories like “Conservative, Moderate” etc.
- Allows them to envision concrete scenarios involving real dollars — not percentages, probabilities, or returns, or pointing at graphs
- Gives them an analogy they can relate to (speed limit) and that taps their emotions.
- Uses a colorful and humorous expression to evoke emotion (“poof”)
- Establishes a contract of sorts by making them accountable for the results of taking on higher risk
But what if you aren’t into Riskalyze and don’t use its risk-score system?
There’s nothing to stop you from coming up with your own risk assessment system, analogies and lingo. Just make sure that what you say follows the “why it works” criteria above.
Examples:
- Use animals (turtle, ant, jaguar, eagle, etc.)
- Use Monopoly money and game board
- Use candy to show a quantity of something versus another
Get creative and be visual! It’ll make the conversation more memorable.
Sara’s upshot
This was just one of the frustrations that advisors told me about – I’ll be writing on others in the future. I hope you’ll listen to the entire webinar replay and would love for you to reach out to me with your questions.
Sara Grillo, CFA, is a top financial writer with a focus on marketing and branding for investment management, financial planning, and RIA firms. Prior to launching her own firm, she was a financial advisor and worked at Lehman Brothers. Sara graduated from Harvard with a degree in English literature and has an MBA from NYU Stern in quantitative finance.
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Every advisor I know (including me when I was in the business) has one “problem client” with whom you don’t see eye to eye over investment performance. This issue is widespread enough to be considered an epidemic in the advisor community.