Why Financial Advisors Need Relationship Alpha

As the saying goes, ‘hindsight is 20/20.’ How many advisors have had conversations with clients summarizing 2013, only to find them disappointed that they did not participate fully in the strengthening equity markets? These were the same clients that were (perhaps still are) reluctant to take on the additional risk because they were still smarting from the real and psychological damage wrought by the experience of 2008. Their actions and defenses were predicated on the outcome of the most recent harrowing experience; thus, their portfolios were allocated to provide ballast – reinforced with ‘belt and suspenders’ – to keep them engaged in the capital markets. Prior to the end of 2013, the trade-off for a high ‘sleep at night’ factor was lower return expectations. Now, in hindsight, these well-rested clients are experiencing, as the kids today say —FOMO — “fear of missing out!”

Challenging Markets Challenge Your Mettle
It takes a delicate mixture of compassion, knowledge and courage to provide direction to clients during uncertain or confusing markets. All markets are perplexing to some degree. This is the irony of investing . . . we trade actual capital today for the possibility of future returns. As wise and well equipped as any of us all are, we cannot predict the future with any degree of certainty. The legendary money manager, Peter Lynch, once said something to the effect that investing allows us to build a bridge of well-thought out and time-tested assumptions, but we always need to take a ‘leap of faith’ between what is known and what will actually come to be.

I share this preamble because this is where uncertainty creates opportunity. Thoughtful advisors can bring a great deal of comfort and guidance to their clients as long as they are willing to take a deliberate approach to both educating and managing expectations. Difficult and confusing times only highlight the need for good advice the value that a trusted advisor can offer. This is when “Relationship Alpha” becomes most apparent in the attribution report between a client and advisor. During these times, conducting a careful review of client investment objectives, risk tolerance, time horizon and life goals (retirement, educational funding, etc.) becomes critical.

Revisit, Revise and Re-educate
At the start of a new relationship these conversations are typically engaging and enthusiastic, but rarely are they revisited with any vigor down the road. Now is the time to tell the client: “Given the market turmoil and the passage of time, let’s engage in these conversations as if we’re renewing our vows and recommitting to one another on your financial journey!” Pose a hypothetical question: “If your accounts were entirely in cash, rather than invested as they are today, what approach would you choose to take now?” Prudent advisors will be prepared, of course, to provide an answer to the same question. This dialogue will help validate the current collective approach, or generate productive questions about its current state. From here, advisors can re-educate clients about the disciplines of investing, the need for proper asset allocation and portfolio construction and the rationale behind chosen asset exposures and exclusions.

I started this piece with a time-tested idiom, and I will end it with one. They say, “The strongest steel comes from that which endures the strongest fires.” Relationship Alpha really comes to the fore during times of complexity and confusion. The strength of a client relationship grows only with dedicated interaction and the reapplication of the vigor and passion that helped the journey begin. Clients engage financial advisors for their thoughts, their judgment, their wisdom and their direction. Now is not the time to be shy or muted in bringing these forward. Always, but especially now, is a good time to show you care.

Download this content in PDF format.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


Get every new post delivered to your Inbox.

Join 90 other followers

%d bloggers like this: