It’s Time to Take the Reins: Guiding Your Clients to the Winner’s Circle

In 2018, Justify won the wettest Kentucky Derby on record: 3.15” of rain fell the day of the race.

In 1957, Iron Liege won one of the coldest Derbys on record: the temperature was 36 degrees, accompanied by 25 mph winds.

In 1959, Tomy Lee won the hottest: it was 94 degrees at race time.

And last weekend, we saw Maximum Security stripped of his magnificent wire-to-wire win — in miserable conditions, no less — when he veered to the right around the final turn, spooked by crowd noise, and impeded the progress of the horses behind him. The historic decision to disqualify him stunned racing fans and perhaps redefined the sport entirely.

But the truth is, racehorses need to be ready to run in any conditions: fast, sloppy, muddy, scorching hot, freezing cold, in total silence or deafening noise. That’s the job of their trainers — to prepare them physically, mentally, and yes, even emotionally, to perform at the highest level despite outside influencers.

And as an advisor, it’s your job to make sure your clients are prepared for any market condition.

In the 2010 study, “The Equal Importance of Asset Allocation and Active Management,” Roger Ibbotson found that 75% of overall portfolio return variance was driven by the cyclical movement of the market. And that market movement can trigger dramatic changes in client emotions, from confidence to concern to frustration.

If those emotions are allowed to dictate client’s’ investing behaviors, it could be disastrous for their portfolios.

That’s where you, as an advisor, need to take the proverbial reins. Use our three best practice tips for keeping your clients focused, steady, and ready to win.

Discourage Emotional Investing with Clear Communication

People are afraid of what they don’t understand. And when they’re afraid, they’re more likely to panic.

As a financial advisor, the fluctuation of the market makes sense to you. But without that same background, your clients’ natural inclinations are just to react to what they see in the moment: buying in too late as the market rises, or exiting the market during a downturn instead of calmly riding it out.

How do you discourage your clients from behaving in this natural, human way? Help them understand what you already know. Ditch the industry jargon and teach them, in accessible language, to see past short-term market trends and settle in for the ride. You’ll help to improve their portfolio performance and strengthen the trust in your relationship.  

Conduct a Thorough Risk Tolerance Assessment

Communicating effectively with your clients also means understanding their specific expectations. But generic risk tolerance questionnaires don’t account for the myriad of ways clients might react in different market conditions — which you need to know in order to guide them successfully.

To get to the heart of your clients’ behavioral styles and expectations, you need to ask the right questions. Tailor your questionnaire to include client perceptions of varying market environments: growth, volatile, and declining.  

The answers will set you up for success as an advisor by providing a foundation of each clients’ market knowledge, negative return tolerance, and market movement acceptance.

Implement Diversification with a Three-Mandate Approach

Once your clients have a better understanding of long-term market trends, and you have a better understanding of their expectations, you can approach their portfolio in a holistic, personalized way.

Building portfolios with an eye toward market changes goes a step beyond simply looking at what worked well in the past. Diversifying portfolios with a multi-mandated approach provides you and your clients with greater investing confidence, regardless of the next short-term market cycle.

Blending client expectations and risk tolerances with not one, but three investment strategies — each designed to perform in a different market — will help you deliver a positive investment experience independent of short-term market trends.

Want to learn more about how our unique UMA process can help you transform your client relationshipsTalk to us today.