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I know and speak with a lot of financial advisors from all over the country, representing many different firms. The vast majority intend to do what is right for their clients, but sometimes they end up doing what is popular. This is especially the case when it comes to communication with clients.
Giving “Right” Investment Advice
Most advisors are careful about investment selection and making sure recommendations fit the client’s financial and psychological risk profile. Many hold themselves to a fiduciary standard.
Markets go through fads – popular investment themes seem to inflate and deflate all the time. Popular investments fads have included cryptocurrency, real estate, as well as the current love affair investors have with AI chip stocks such as Nvidia. When investments are popular, investors may clamor for them. Many advisors do the right thing in talking to clients about risks, and ensure that any exposure to popular assets is at an appropriate risk level.
Choosing “Popular” Communication
I outline below three ways that advisors fail their clients with their communication by following what is popular vs. what is right.
1. Thoughtless Communication Strategy
Most financial advisors I know put next to no thought into their communication strategy with clients. The most popular communication “strategy”, if you can even call it that, is to sign up with some marketing library where they send out newsletters on the advisors behalf and post to social media. It is what I call the “thoughtless strategy.” Very popular, but doesn’t help investors weather the psychological storm of anxiety, uncertainty, and powerful emotions that affects just about everyone. With all the free tools out there for investors, you would think improving the investor experience would be one of the major focuses of advisors.
2. Sending Economic Reports/Market Projections
Many investors want market updates. The brain, which hates gray areas, is a sucker for anything that feeds the illusion of certainty. Our brains eat up forecasts and anything that provides a plausible explanation of why X happened (or why Y will happen). Financial firms create these reports not because they have any history of being accurate, but because investors want them. Advisors say the same thing.
In other words, they send them this financial smut because it is popular among investors. Advisors are doing what is popular, not what is right for the client. Unless the advisor wants investors to think about every market move and what “experts” are saying about it, this kind of stuff shouldn’t be sent. Most advisors say they want their clients to trust the plan and trust the advisor. They want them to remain disciplined to the plan. And then they send them this stuff. Not too much different from warning a child of the dangers of smoking, and when they want to try smoking because their friends are doing it, we give them a cigarette.
3. Entertaining Misguided Questions
Investors are always asking questions such as:
- What will cause the next recession and how long will it be?
- What will happen if (Candidate) gets elected?
- What is the Fed and interest rates going to do?
- Because of any of the above, is it time to get defensive (go to cash)?
Most advisors will do their best to answer these questions. Why? Because the client is asking. Unfortunately, this is the wrong response. Almost all questions investors pose have to do with things we cannot predict nor do we have control over. So why entertain such nonsense? By definition, an advisor responding to these questions is engaging in speculation. They are answering these kinds of questions because it is popular, but it isn’t right for the client.
If an advisor answers these questions, they reinforce and implicitly invite the client to keep focusing on things we cannot predict nor control. That is not good guidance! It certainly won’t help the investor improve their decision-making process.
Effectively Responding to “Bad” Questions
When we are asked questions that have no definitive and enduring answer, we should not answer; instead we pose a different question. I’m not suggesting you ignore the question. Instead, there are three steps to effectively respond to such a situation that will be right for your client.
- Validate the question and why the client may want to know it (get on their side)
- Explain why you aren’t going to answer (just speculation anyway)
- Pivot to what the investor is really concerned about – a market drop.
After explaining that you aren’t going to answer the question because it would just be speculation, tell them you would like to answer a different question:
What are we going to do when the market goes down 25%?
This requires no speculation, only a reasonable assumption that the market will go down 25% at some point in the future (or whatever percent you want to use). This is a very good discussion to have!
Now you can talk about whether client would like to sell when it goes down, hold, or even buy. And from there you can discuss an action plan to ensure they hold or buy during the stress and fear that accompanies significant market drops. The bottom line is that you transformed a speculative question into a question that we have complete control over. And that is doing what is right for the client!
I encourage you to try this out, and then let me know how it goes. I have been doing it for years and coaching advisors to do the same thing. It has a strong track record in getting investors to focus on what really matters.
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