Building Resilient Clients

As the Dow plummeted as much as 460 points this week, the Wall Street Journal reported the difficulties many advisors are facing to keep clients from capitulating and making emotionally-charged poor investing decisions.

In the story, an advisor recounted that “one [client] who never calls or emails reached out looking to sell out of his entire stock portfolio. Another sent a one-line email saying ‘Dude…seriously, I’m not sitting around for a 15 to 20 percent drop.’”

There just aren’t two better examples of why advisors need to build resilient clients, and how Riskalyze can help them do that.

Whether that client is capitulating and ordering you to sell, or whether they’re warning you that their capitulation point is in sight, it’s critical to understand precisely what they are saying: “I have a Risk Number, and it feels like we might be getting close to it, but I’m not sure.”

Once an advisor has captured a client’s Risk Number, reshaping a portfolio to fit that client becomes simple — and the client then gains an understanding of what is “normal” for their portfolio.

Thus, when the nervous client called in requesting to sell everything, the advisor would be able to respond with logic. “Pete, remember that we determined you’re a Risk 48. That meant you were comfortable with your portfolio being down 9% in a six month period. We’re only down 3%. The worst thing we could do is sell at the low. Don’t you think we should stick to our plan and stay invested like a 48? It’s been serving us well so far.”

Translation: the advisor has reminded the client of the “moral agreement” the client made to be long-term focused when they originally constructed that portfolio.

And on the other hand, when the client emailed in about the 15% to 20% drop, the advisor would be able to respond much the same way. “Tom, remember that we’ve invested you like a Risk 55, and that’s a lot less risk than the market as a whole, which is a Risk 82. Your portfolio has a 95% probability of staying within -10% to +15% over the next six months, and that’s been serving us well. Of course, black swan events like 2008 can happen, but we’re going to be better off sticking to your Risk Number and not trying to time the highs and lows of the market, don’t you think?”

We couldn’t put it any better than our own customer, Alex Scott. Alex recently tweeted at @alexscottcfp that "It’s a great time to use a tool like to measure a client’s risk, with fear so prevalent right now.“

Remember that you don’t have to dread this week’s client reviews. Use an open discussion about risk to turn them into a confidence-building session with your client. They’ll appreciate you for it!