Perhaps the scenario sounds familiar: You’re sitting across the table from a client who finally accepted your repeated invitations to meet and go over his portfolio, which has been in maintenance mode for the last decade or so. He’s been relatively unengaged, and this is the first real opportunity you have to review his investment goals and further develop that all-important, trusting advisor-client relationship.
This situation isn’t uncommon, and yet you know it’s important to keep the conversation going with your clients to ensure their portfolios are still aligned with their current thinking and future needs. In addition to reviewing any existing portfolios (the tangible), you’ll want to revisit where they started and where they are today. Has anything changed, including their feelings, apprehensions and fears (the intangibles) which will impact their level of risk tolerance.
Conservative? Moderate? Aggressive? These are prevailing terms used by financial advisors when talking with clients about risk tolerance. A study by Spectrem Group, however, found that investors had a difficult time defining their risk tolerances using these common terms, and each definition held various meanings.1
Reviewing their original risk tolerance questionnaire can help get the ball rolling and identify if a client’s appetite for risk may have changed. Are they more cautious or hesitant in their search for returns?, Often what’s said on paper is often inconsistent with an investor’s true comfort level. In addition, their financial situation may not be conducive to the level of risk indicated in their original results. For example, while a client may indicate that they fall in the aggressive investor category, the Spectrum study found that these self-described aggressive investors still owned some fixed income investments — likely linked to tensions between seeking returns and preserving capital.2
How can an advisor assess a client’s true risk tolerance? The key is to personalize your conversations and go beyond the survey and traditional industry speak. Here are some questions you can ask to help you get to know where your clients truly stand.
1. What is your greatest fear related to life “after retirement”?
This may seem pointed, and you can be assured that there are clients who may have never voiced the answer out loud. But as the time approaches, they are likely experiencing anxiety in one way or another about retirement risks.
Investors are often asked to describe their goals upon retirement, but have a hard time identifying the underlying fears that fuel those goals. Probe deeper to draw out the issues. For some, it may be health concerns and how to pay for potential medical expenses or long-term care, while others may live an active lifestyle and are concerned about outliving their money. Will I still need to work after age 65? Will I have enough to travel? Will I need to downsize my home?
By asking personal questions, clients can come to better understand the correlation between their investment strategies and their unique life situations. What may have seemed to have no initial connection to finances — a desire to spend more time with grandchildren, for example — will quickly become evident when they understand how their potential income after retirement can influence their ability to travel to visit family members or to provide financial assistance. If caring for family is a consistent theme in conversations, they’ll also likely want to make sure they’re preserving wealth for their beneficiaries.
2. What is your greatest fear about investing?
When making investment decisions, many clients consider potential losses more than potential gains, no matter how conservative or aggressive they identify themselves as. As investors age and retirement approaches, their fears about loss typically increase and they become more conservative.
No matter how investors define their risk tolerance, research shows that having a blend between capital preservation and growth is important.3 Make sure clients understand the ways in which their retirement portfolios are protected from potential loss or may be vulnerable to market volatility based on the types of investments they hold. Understanding where your clients are on the spectrum between preservation and growth will aid in determining their confidence levels and can especially help you advise your more risk-averse clientele.
3. What is your greatest fear about working with an advisor?
This is a question that advisors rarely ask. But some investors are wary of the role that advisors play in their financial future. Bringing this issue to the forefront early on will go far in your efforts to build trust with clients.
Despite legislation and regulations aimed at curbing unethical practices, stories about disreputable financial firms still make headlines and can put an investor on edge. Encourage your clients to ask questions: Are you paid by commission or a fee? How do those costs compare with industry standards? How can I monitor my accounts? The key is to encourage an atmosphere of openness, transparency and trust, and to form a relationship that truly benefits your clients.
Exploring the fears that are driving your client’s investment decisions will help to determine their willingness to take on risk and whether they’re focused on preservation or growth. There are many more questions and conversations to be had, so use our helpful Guide to Conducting a Risk Control Review eBook to serve as a catalyst. Simply click the link below.