Helping Your Clients Understand Risk and Patience

by Mitch Anthony

Risk is inherent in every investment. Money that is conservatively parked in CDs or money market accounts risks not keeping pace with inflation. Stocks that rise quickly risk meteoric falls. Finding appropriate risk can only be decided in the context of personal goals, comfort levels, and time frame. All three factors must coalesce for a risk to “feel” right. Most importantly, clients need to understand that patience is their greatest virtue when it comes to investing. If they are patient and look at the long-term, they will be rewarded. If they jump in and out of the market every time there is a hiccup, they will miss important opportunities for growing their portfolios. 

Risk knowledge refers to a client’s grasp of risk and return with each investment decision. The greater the comprehension of risk, the greater the likelihood that decisions will be made that are consistent with personal goals and appropriate timelines.  

Because there is no accepted measurement device to evaluate risk knowledge, advisors have used subjective judgment to evaluate a client’s relative level of risk knowledge. This judgment can become more concrete only by advisors increasing their efforts toward risk education with their clients, specifically ensuring clients understand that investing takes patience––and in some cases, an iron will.

If you see that a new client has risky investments in his or her portfolio, does that mean there is a high-risk tolerance? Or, could it be the client is simply risk-addicted, reckless, or ignorant?  Many advisors go on to recommend higher risk investments when they see the presence of others in the portfolio. In an article that appeared in the Journal of Financial Planning, David Cordell, Ph.D. writes that a portfolio can be a misleading indicator for many reasons, including:

• A client may not have understood inherent risk in specific investments.
• Assets may have come from a spouse or inheritance.
• A client’s financial situation may have changed since assets were obtained.
• Riskiness of assets may have changed since they were obtained.
• Retention of assets may be for sentimental reasons.
• Retention of assets may be for tax reasons.

The best approach is using thorough discovery and doing your best to educate each client on the specific risks of each investment decision while emphasizing the important of patience. For the purpose of financial wellbeing, it is important for clients to seek the middle ground on the risk tolerance continuum and commit to becoming a calculated risk taker. In making financial decisions, a calculated risk taker does not avoid risk or exploit risk but learns to manage it.

To become a calculated risk taker, clients must first become aware of the underlying emotional motivators that repel or draw them to financial risk.  The next step is for them to be educated so that they can replace irrational responses with rational decisions. Your conversations with clients should address the following:

• Help clients learn the features and dynamics associated with common savings and investment vehicles: from money markets to bonds, mutual funds, stocks, and any other vehicles your firm promotes.
• Teach clients how to categorize investment vehicles as cash equivalent, income producing, growth producing, or speculative.
• Help clients learn how to match goals and investments properly:  short-term goals to cash equivalents, mid-term goals to income producing, and long-term goals to growth producing. Clients need to think about putting anything other than “extra” investment dollars in the speculative category.
• Educate your clients on asset allocation. Clients need both a logical and emotional understanding of why we spread savings and investment dollars across investment categories and in a variety of vehicles.
• Be sure your clients understand the role that patience plays in investing.

Helping clients understand how patience plays a critical role in growing their portfolios will contribute to relieving the angst they’re feeling as the markets continue to fluctuate––and help you better manage their investments.

Adapted from Your Clients for Life: The Definitive Guide to Becoming a Successful Financial Life Planner, Second Edition.  ©2006.  Available from Advisor Insights Press.

Mitch Anthony is the founder and president of the Financial Life Planning Institute, the leading provider of financial life planning tools and programs. 

For more than a decade, Mitch and his team have provided training and development for both individual advisors and major organizations throughout the world. Mitch personally consults with many of the largest and most-recognizable names in the financial services industry on both financial life planning and relationship development.

Mitch has been named one of the financial service industry’s top “Movers & Shakers” for his pioneering work, and is interviewed by the media on a regular basis. The Institute is partnering with both Texas Tech University and the University of Georgia to develop financial life planning programs for their undergraduate programs. Mitch is a popular keynote speaker, columnist for Financial Advisor magazine, and host of the daily radio feature, The Daily Dose, heard on over 100 radio stations nationwide.  His syndicated column, Return on Life, appears in newspapers across the country.

Mitch is also the author of many groundbreaking books for advisors and consumers, including From the Boiler Room to the Living Room, StorySelling for Financial Advisors, The New Retirementality, Your Clients for Life, and Your Client’s Story. For information on these books and more resources, click here.

© 2008 Mitch Anthony