Being a good financial adviser requires mastery of a wide range of technical skills. Being a great financial adviser requires having skills as a counselor and psychologist. Being an outstanding financial adviser requires developing your skills as a teacher. Here’s why.
The job of a financial adviser is to help each client get from Point A (where they are today) to Point B (where they want/need to be at some point in the future). The question is always how to maximize the chance that the client will arrive safely and securely at Point B.
When I first entered the financial services industry, the focus was on the technical aspects of this journey. Advisers used their financial planning and investment skills to define and plot the course from Point A to Point B.
Later, the focus broadened to include another dimension of the problem. Supporting clients emotionally and coaxing them to do the right thing has always been part of the job. But our understanding of the importance of that aspect of advising clients changed when research from the world of behavioral finance entered the mainstream.
Soon we were awash in new jargon that labeled each quirk in the vast inventory of our financial decision-making dysfunctions. A tsunami of information familiarized us with the basic concepts of behavioral finance, but left us unsure about what, exactly, to do with this information.
One exception is the area of risk tolerance. A host of service providers emerged with products that purport to help us measure the risk tolerance of our clients. But what should you do when there is a significant gap between a client’s need to take risk and their comfort in doing so?
Say you have a client that has done a poor job of saving over the years. The client has no choice but to be aggressive in their investment strategy if he is to have any hope of meeting his goals. But what if his tolerance for risk is very low? Do you ignore the client’s discomfort with risk-taking or do you dial down the portfolio in favor of a smoother ride?
Actually, this is a false dilemma. It assumes that the client’s risk tolerance is a fixed feature like the nose on his face. This is simply not true. Soldiers learn to fight with bullets whizzing by their heads. Athletes learn to maintain their focus in the midst of chaos. Clients can be taught to better weather the inevitable storms they will encounter. Education is the key.
Most advisers are comfortable answering client questions about investing, but this level of education is reactive and event driven. Exhorting clients to “think long-term” and “stay the course” is not education, it’s sloganeering.
Being a good investor requires a solid frame of reference. Clients need to know what to expect and why things happen the way they do. They need that course we all should have had in school, but never did. Providing this level of education requires thought, planning and a proactive approach. But like soldiers and athletes, clients can be trained to be better, more confident investors.
If you want your clients to make it successfully from Point A to Point B, you should put as much time into teaching them about the journey as you do developing financial plans and investment solutions for them.