Broker Check

3 Questions to Ask to Make Your Clients Better Investors

August 23, 2019

How much easier would your life be if your clients were better investors?

What would that look like?

Better investors would better understand the markets, better understand their investment goals and how to meet them, and, ultimately, make better investment choices.

With better investors, you would spend less time fighting uphill battles to get your clients to make the decisions that are best for their financial future – like backtracking to justify why their well-diversified portfolio isn’t “beating the S&P,” or getting them to commit to the proper level of diversification in the first place.

These challenges seem to compound every day. That’s typical of a sustained bear or bull market. Our prolonged environment of growth has skewed investor expectations – leading to a significant rise in passive investing.

And those challenges are more than a headache. They consume valuable time. Think about how much time you spend assuring and reassuring clients their investments are doing what they are supposed to do? Now imagine what you could do with that time. You could hold more productive meetings, allocate more time to servicing your top clients and increase your focus on prospecting new investors to grow your business.

The key is to frame diversification in a way that investors can easily understand and accept – making better investors almost immediately. Easier said than done? Not really. Simply ask three questions you already know the answer to.

Your First Question – Global markets, though volatile, have historically been great engines for long-term wealth creation. Should a portion of your portfolio be exposed to the returns and volatility associated with these markets?

Your Second Question – Would you expect a portion of your portfolio to be actively managed during periods of market volatility?

Your Third Question – Should a portion of your portfolio be excluded from market movement during periods of market declines?

The answer to all of these is overwhelmingly going to be “Yes.”

There is a very small percentage of investors who don’t want any exposure to the market. If a client is speaking with you, they clearly want some help managing their investments – specifically as markets change. And who wouldn’t want a portion of their portfolio to be excluded from decline in a market downturn?

So what’s the point of asking these questions if everyone at the table knows the answer?

The point of the questions isn’t to learn new information about the investor or even to help the investors discover new truths about their investment philosophy. A risk assessment would be more telling. Rather, each question helps frame diversification in the client’s mind before portfolio construction begins.

These questions help the client clearly understand the role of strategic beta, tactical beta and alpha in a portfolio without getting overly technical. When paired with a quality risk assessment, they serve as a foundation for the portfolio and a reference point for every subsequent discussion – and while the framing of diversification should help reduce the gap in portfolio outcomes and client expectations, you can use them to more easily address common client questions and concerns.

In the end, these questions will give you more freedom to build portfolios with an alpha element, improving the portfolio in two ways – downside protection, and more freedom to commit to the right levels of growth-generating beta (a bi-product of the security provided by a dedicated alpha sleeve).

How would a client-base of better investors impact your business?