Broker Check

Your Most Important Client Meeting Ever

May 10, 2018

As markets continue to rise, so does every investor’s vulnerability to a fall

A word of advice – don't look down. You'll only realize how far you could fall.

That advice has never been more relevant for investors and advisers as equity markets soar to new heights. We've seen a long and steady rise in the market, fueled by low volatility, a calm interest rate backdrop and the promise of corporate tax relief. The benefits of a rising equity market are clear — larger portfolios generally equate to larger revenue streams for advisers. Tensions between clients and advisors are also reduced thanks to an overall positive investment landscape. A client who invested $400,000 in 2008 in line with the MSCI World broad-based index now boasts over $1 million in investible assets. While your clients undoubtedly are experiencing varied levels of success, the overall investing landscape has been positive for a long time. And therein lies the danger. As markets continue to rise, so does every investor's vulnerability to a fall, along with their advisor's. Account growth through rising equity markets and client apathy (seen in the indexing craze) increases exposure to market volatility and risk. Pair that risk with looming interest-rate changes and a shaky political backdrop — both threats to the market's recent hot streak — and you can clearly see the dilemma that is making today's client meeting the most important ever. What can you do to reduce vulnerability? Follow these four steps:

Insist on a client meeting.

The key word here is "insist." When times are good, clients are less likely to want to find time to meet with an adviser. Be upfront and clear about the gravity of the situation. The better their portfolios perform, the more they stand to lose as markets change.

Help them understand what loss would look like.

You shouldn't scare your clients into diversification. However, since today's client holds losses more dear than gains, it is prudent to protect your clients and yourself from the sticker shock of loss. Speak in dollar terms to best communicate your points. Use a 20 percent drawdown as an example in their equity asset allocations. What would that look like in their portfolio currently? What would it look like if their equity allocation were diversified elsewhere?

Identify client expectations in various market cycles. In the end, clients leave advisers because there's a gap between expectations and delivery. That gap is magnified as account sizes increase. Ask three questions to proactively understand what's expected in each potential market scenario:

  • Growth Market. Should a portion of your portfolio be exposed to the returns and volatility of global markets?
  • Volatile Market. Would you expect a portion of your portfolio to be actively managed during periods of market volatility?
  • Declining Market. Should a portion of your portfolio be excluded from market movement during periods of decline?

Implement changes to align the portfolio.

Combine clients' market participation profile, risk score and time horizon to adjust their portfolio allocation mix. Pay attention to unnecessary overweights to strategic beta in equities and core fixed income. Clearly define how each allocation decision supports the client's predetermined expectations in each market scenario and remove any misalignment between potential portfolio performance and client expectations. There's a fundamental concept in economics called reversion to the mean — a theory suggesting investment prices and returns will eventually move back toward an average. While the rise and fall in equities is out of your control, it's important to consider what that reversion, or fall in this case, would mean to your clients. That's why I advocate for focusing on what you can control, and preparing portfolios to meet expectations, regardless of market cycle. The only question you need to answer: If the market went down tomorrow, would your clients be surprised by their portfolio performance?

Are you prepared to have these important conversations with your clients during periods of market volatility? To learn more about how to coach clients through uncertainty, contact Iron Point today for a no-obligation coaching call.