Originally posted at fa-mag.com by Mitch Anthony, April 1, 2023.
During the several years I’ve tracked the concerns of financial advisory clients, I was surprised to learn that one of their more important interests was re-examining their investment philosophy, something up there with worry about their aging parents and their children’s college.
I guess I shouldn’t be surprised given what’s happened in the last few years. When you look at the rapid ascent of the ESG space, you see that clients want to more deeply explore the principles and philosophies that guide their money decisions.
As I talk with them more about what’s on their minds, I’ve developed a series of questions to help them in this phase of philosophical discovery:
1. If I suggested buying 100 shares of Company XYZ, what would be the first three questions you would ask?
2. What are the guiding principles and philosophy that you follow with your money? Who are your main sources of information?
3. Are there any investments you would avoid as a matter of principle?
4. What does your money represent to you? What price or sacrifice was made to earn this money?
5. How would you define “true wealth”?
In this article, I’ll examine the first three questions.
If there’s any area where we desperately need to grow “antennae” with clients, it’s with their sense of principle. What are the fundamental truths that guide your client’s conduct? Are their personal principles a good match for yours? If not, are these people good clients for you?
Without clarity about a client’s principles, you might end up trying to serve a virtual flea market of different mores, whims, values and expectations, and it will drive you crazy over time. So a conversation about principles is intended to help preserve your own sanity as well as set some guideposts for your clients along their journey.
When you talk principles with clients, start by asking them about their rationale for investment decisions (the question about Company XYZ). The following questions help you establish their boundaries, something it would obviously be in your best interest to know before you start making investment recommendations, lest you find yourself out of bounds early in the relationship.
Question 1: If I suggested buying 100 shares of Company XYZ, what would be the first three questions you would ask?
The answers to this question demonstrate your clients’ rationales, the way they make decisions, and their criteria for investing. As important as it is to know what your clients will invest in, you also want to know why they are willing to invest in something. So if your clients have chosen a certain security or company to plow their money into, you might want to ask them questions like these:
• What does the company do, and why do you think its prospects are better going forward?
• Who told you this was a good idea, and how often is the individual right about investment tips?
• Who is running the company, and how is it ranked as far as great companies to work for?
• How has this company performed for the past few years, and has it had the same leadership?
• Is this company producing goods or services that are part of a growing consumer trend?
• Has the company been in any trouble for things like its accounting, etc.?
The answers to these questions will reflect the unique parameters of reason each client applies to their investment decisions. Wouldn’t it be great if you knew these before you called them with an investment idea, something you could offer a better rationale for?
If you grasp your clients’ framework for reasoning, you can make notes in their file for future reference, and check your investment ideas against their profile. This is a simple way to respect the way your clients think through and make investment decisions.
Question 2: What are the guiding principles and philosophy that you follow with your money?
Clients may need a moment to think through this question. But their answers will show you the boundaries they have established with their observations and experience.
The advisors who’ve spoken with me at seminars over the years usually get responses like the following ones when they ask clients about how their money attitudes developed:
• “My father once told me to be wary of anyone who pressed me to make a quick decision. He said that those who wanted you to hurry rarely had your best interest at heart and, more than likely, had a good reason themselves for wanting you to hurry.”
• “I don’t believe in investing with borrowed money. I watched a friend lose everything in a bear market with that approach.”
• “Live on less than you make, spend only what you need to, and invest in the markets no more than you can afford to lose.”
• “My idea is that you can’t get so bound up over investing and saving that you fail to enjoy life today. I believe in setting a percentage that you are going to save and sticking with it. But you can’t forget to invest in the ‘here and now’ as well. You only live once.”
• “I don’t buy startups. The bigger the hype, the further I run.”
• “My philosophy is that I want to know what is most popular right now and then look at strategies for going in the opposite direction. My experience has been that not only does the ‘herd mentality’ rule, but also that the herd usually runs off the cliff together.”
• “My philosophy is that I don’t want to do anything that could possibly threaten my family’s lifestyle if it were to go wrong. I’ve got to be able to manage the worst-case scenario without upsetting the quality of life we have built so far.”
Every client has idiosyncratic boundaries that are much too abstract to be captured on a risk-tolerance questionnaire and that can’t be measured by a number. That doesn’t make the boundaries fuzzy, however. In fact, clients are quite clear about their boundaries, and play by hard and fast rules that are emotionally grounded and best not violated.
As you size up your clients and their values, another question you may want to ask is: “Who are your main sources of information when it comes to making investment decisions?” There are a lot of gurus in finance, and you’ll want to know where your clients are getting their financial education—or where they watch “financial porn,” as the case may be. If they are big fans of “Joe Infomercial”—somebody with slick hair and the promise of how to get filthy rich without any risk, fees, commissions, or paperwork—you’ll probably want to be aware of it.
An advisor in the South recently told me that a prospect asked him, “Do you follow the guidelines of so-and-so because he says such and such?” The advisor answered that although he wasn’t “certified” by so-and-so, he followed sound financial principles with all his financial advice to his clients. The advisor told me, “The irony was that her portfolio was a mess from following this guru’s advice. And that particular fact had not yet settled upon her.”
Question 3: Are there any investments you would avoid as a matter of principle?
For a couple of years, I took an informal poll of my advisor and consumer audiences about Question 3: I asked consumers, “How many of you would like to be asked this question?” About 90% of them raised their hands in the affirmative. When I asked advisors, “How many of you are asking this question?” less than 10% said they did.
It’s not everybody, but there are clients who will speak with absolute conviction and even resentment about arenas in which they do not want their money invested. I have heard stories from the predictable to the bizarre. Here are some examples:
• The client who wanted to avoid HMOs because of a traumatic and life-threatening experience.
• Those who wanted to avoid tobacco, alcohol, gambling and other “sin” stocks.
• Those who wanted to screen for environmentally friendly companies and avoid gun manufacturers, etc.
• Those who wanted to avoid companies shipping work overseas.
• The client who lost an eye from an exploding cola bottle and wasn’t interested in reinvesting in the cola company.
• The client who had a complaint against a particular manufacturer over a faulty product or an extremely negative experience.
Many clients today buy into the idea of alignment, where there is no disconnect between what they believe and feel and how they invest and spend. If you ask and they are interested, there are a number of excellent screening products on the market, products that allow the client to lay out definitive criteria that the software then uses to find equity and fund matches. As you help clients find clarity about their investing, it’s good to remember: More important than the value of the portfolio are the values that drive that portfolio.