When choosing a financial adviser, many investors struggle between wanting a top hitter who can beat the market and yet not wanting to risk too much for it. Ideally they would find someone to maximize return and minimize risk, but even the best and the brightest advisers can’t do both consistently.
Perhaps this explains why advisers who provide investment management spend so much time discussing their philosophy with prospective clients. In introductory meetings, they share their methodology for stock picking, market analysis and portfolio diversification.
They may ask newcomers to rate their risk tolerance. This gets tricky because individual investors tend to mischaracterize how much risk they’re willing to take in pursuit of outsize gains.
For consumers, the real challenge is setting realistic expectations for what their adviser can — and cannot — do. Some investment managers boast about their proprietary research that helps them identify breakout sectors or undervalued stocks. They may also cite their fondness for overlooked asset classes and track record of superior performance.
By contrast, other advisers emphasize their commitment to wealth preservation. They caution that their clients probably won’t outperform market indexes, but they will maintain a diversified portfolio to mitigate risk.
Advisers know that forcing clients to choose between wealth creation or wealth preservation creates tension. It’s normal for clients to want both, and to avoid getting boxed in, some advisers apply an entirely different construct to describe their services.
Jared Snider, an adviser in Oklahoma City, Okla., doesn’t make clients decide whether they want to accumulate or safeguard their assets. Instead, he encourages them to step back and rethink how they view money.
“Money is just the engine to fuel the ‘why’,’ he said. “Why is money important to you? What’s its role in helping you achieve your goals?”
For example, clients in their 40s may want to invest more aggressively so that they hit a desired “magic number” that enables them to retire in a few decades. They’re willing to risk short-term declines to attain a long-term target.
Others may view money as a way to savor retirement, allocating a certain amount every year for travel, philanthropy and supporting their kids and grandkids.
Some advisers realize that accommodating clients hungry for the next hot stock is a no-win proposition, so they don’t even try. Jim Sexton, a certified financial planner in Hudson, Ohio, often leads public seminars as a prospecting tool. He says that at many of his events, someone will raise their hand and ask, “Are you beating the S&P 500?”
“I reinforce that throughout the client relationship, I’m asking them at every meeting, ‘Are you on track with your plan?’ not ‘Have your assets outperformed some arbitrary index?’,” Sexton said. “I hammer away that market returns are not relevant to you. Your personal return is relevant to you. It’s what keeps you on the track we’ve set.”