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A lot of grief is caused these days by miscommunication and unmet expectations. When we expect A, especially if we are told to expect A, and B occurs, we may experience grief, anger, and disillusionment. Because life is filled with uncertainties, and we can’t fathom every possible outcome, we should expect to experience unmet expectations somewhat regularly.
Setting Return Expectations
One of the principal duties of a financial advisor (and really any professional that wants to ensure a positive client experience) is to set clear and realistic expectations. Unfortunately, many advisors fail at this…miserably. Sometimes, dare I say oftentimes, when an investor makes a poor decision, it can be traced back to the advisor not setting expectations. Its an error of omission, not commission.
For example, advisors will often share the long-term expected return of a recommended portfolio. They may also share historical performance as well. This is completely normal and an essential part of the planning process. But what they don’t share is of greater importance. And that is how the portfolio may perform in the short term. This means we have to bring up the possibility of loss, even a significant loss. It would be irresponsible to not expect a significant drawdown of a growth portfolio at some point. And you would be kidding yourself if you think that you (or some market “expert”) will be able to discern a temporary pullback from the start of a brutal bear market. Those things can only be identified in hindsight.
Setting Emotion Expectations
And now let’s talk emotions. Advisors need to talk to their clients about natural emotions and urges they will feel when markets up and down significantly. Fear of loss and FOMO are prevalent. So why aren’t we talking more about feelings in a proactive manner. “In a strong bull market when certain securities are skyrocketing, your portfolio may underperform. You may be disappointed in our performance and want to make changes to own more of the securities going up…” And then talk about the fact those feelings are completely normal, but why they shouldn’t be acted upon. And these conversations need to happen in a rational state of mind, ahead of time, or they won’t be of much use.
When Expectations Don’t Match Desire
And then we have the challenge of when expectations (market losses, underperformance…) are not what we want. Because we desire certain outcomes so much, we have a hard time accepting reality. This happens even when we know that our desires are not rational. For example, many investors want a high growth and low volatility portfolio. But that doesn’t exist in real life. Only in marketing advertisements and ponzi schemes. But that doesn’t change the fact that we unconsciously want our portfolios to perform that way.
So what do we do there? That is where regular and constant communication (coaching) of expectations and perceptions is essential. They get it one day – they completely understand and agree. But these deep desires and emotions brood within us all the time. The best antidote to this is having robust and consistent communication/coaching messages for your clients. Marketing libraries won’t suffice. Messages that are direct, tackling the emotion, expectation, perception of the day, and empathetic are needed for greatest impact.
Related: When Is It Easy To Invest?