When weighing the risks and benefits, many of your clients would rather have portfolio protection with growth potential than portfolio performance that is susceptible to market volatility.
This preference likely aligns with how many financial advisors approach clients’ investment and retirement planning strategies by prioritizing risk management and wealth preservation.
On its surface, this alignment suggests harmony; clients generally want protection and advisors are willing to provide strategies accordingly. For investors who are already in higher wealth tiers and simply want to live off existing assets, this approach may be appropriate.
However, those investors with fewer investable assets might lack sufficient savings to fund retirement in spite of being cautious about preserving their accumulated wealth and minimizing risk.
Risk Aversion and Human Nature
The perennial challenge for advisors is moving conservative clients toward balancing downside protection with growth potential. Evaluating clients’ risk tolerance is a standard practice for financial advisors, but it is admittedly an imperfect science.
Why? Clients generally need to self-assess risk tolerance and might simply misjudge it, potentially leading to irrational panic decisions that might result in a loss of assets over time.
To accommodate investors who are less inclined to assume more risk, advisors may best serve clients by educating them on why more risk may be necessary and suggesting possible paths toward growth potential in their portfolios. What can’t be ignored, however, is human nature. Clients will ultimately make their own decisions, but that shouldn’t dissuade advisors from broaching the subject of how assuming portfolio risk might be in their own best interests.
To that end, it’s important for advisors to better understand the risk-averse client and adopt counseling strategies that resonate with their mindset. That’s why Behavioral Financial Advice (BFATM) resources may be helpful tools to address the emotional pitfalls that sometimes derail retirement plans.
The approach may not get risk-averse clients to re-think their portfolios immediately, but being aware of and addressing these three prevalent emotional strongholds may help build client-advisor trust that eventually leads to less guarded, more receptive conversations about risk-return balance:
- Clients who protect their portfolios may be anxious about wealth preservation. It’s not uncommon for risk-averse clients to be highly sensitive to market volatility and fluctuations in portfolio levels and account balances. Advisors who are proactive in reassuring clients about the reasons behind perceived “threats” and suggesting available actionable next steps, if any, may head off undue client panic.
- Clients who protect their portfolios may be doing so to ensure a legacy. Commitments to spouses, children, grandchildren, etc. might be the driving force behind clients avoiding financial risk. Or maybe you have a client who prefers to leave a different kind of legacy. Advisors may find opportunities to use these types of client-defined obligations to provide a new perspective on how their investment decisions now — including risk tolerance and management — could impact future wealth transfer.
- Clients who protect their portfolios may feel financially powerless. Risk-averse clients may consider themselves victims of the market rather than decision makers in their wealth management. To help correct this misperception, advisors can look for ways to empower clients with active control of the process — perhaps by encouraging them to craft a vision and mission for their wealth that aligns with their values.
Not all clients see risk as a potential route to wealth accumulation, and they may well be correct in their given situation. However, advisors who are willing to challenge these beliefs and suggest appropriate risk opportunities often serve their clients’ best interests.
It also encourages prospective clients to look further into the value of a relationship with a financial advisor, as detailed in our investor guide, When and Why Should I Hire a Financial Advisor? Click the button below to access your copy now and share it with your clients.