Q: What is the client wealth cycle?
A. The client wealth cycle is the evolution of an investor’s lifestyle, financial needs and goals as they move through life. There are five distinct stages: modest accumulation, peak accumulation, semi-retired, active retired, and fully retired. As clients move through these stages, advisors should continually adapt the two key areas of their business – investing and service – to meet investors’ redefined needs. Frankly, the one-size-fits-all approach to advice and investing won’t work. The real question isn’t whether clients will change, but rather whether your business will change.
Q: How can an advisor be successful by using the client wealth cycle concept?
A. It’s often said that individual investors would be more successful if only they invested the way institutions — such as defined benefit plans or foundations — invest. Proponents of this theory use a chart from Dalbar showing the portfolio returns of institutions versus individuals. And, you guessed it, institutions are winning.
But, individuals are not like institutions. For starters, institutions don’t have to pay taxes. They also, often, have unlimited time horizons and have only one goal in mind. If an advisor took an institution’s investment strategy and copied it directly for an individual, it simply wouldn’t work. That’s because individuals go through the client wealth cycle and at each stage are looking for something different. As an advisor, you should adapt your strategies and solutions to meet the evolving needs of clients. The best way to do that? Become a mind reader. Know your clients so well that you know what they’re thinking at every step.
Q: How can I construct better portfolios by using the client wealth cycle?
A. Most advisors do a good job of understanding the specific goals of each client. Yet, when it comes to portfolio implementation, they leave these distinct issues aside and lump all the assets into a single portfolio. With this approach, clients have no choice but to analyze their portfolio in the aggregate – it’s either all on target, or all off target. In reality, that’s not an accurate picture. Typically, this incomplete view causes them to panic. Often, they take one look at their portfolio and want to sell everything.
Separating portfolios and managing them differently is the key to the investor’s success. Let’s take, for example, a 65-year-old couple, living off their portfolio. In the short term, they will need enough money to support their lifestyle. In the long-term, they still need growth and inflation protection because they may live another 30 years. Yet, according to traditional portfolio theory, the client would start with a 60/40 portfolio and decrease equity exposure over time. However, if you apply the client wealth cycle, you’d instead construct three completely separate portfolios:
-- Short term cash for the next few years
-- Moderate equity exposure with low volatility
-- Inflation-beating growth portfolio
Sure, you may be able to accomplish the same thing with a single portfolio. But, if the client panics, they might hit the sell button or switch advisors altogether. By separating the assets, you are matching the investing structure with the way clients think about their investments.
Q: How can I improve client service by understanding the client wealth cycle?
A. When it comes to client service, most advisors have it backwards. Most advisors start with what works best for them, and then how to apply that to a client’s needs. Instead, advisors should begin with their clients and determine what they need.
Take, for example, Gen X and Gen Y investors. There’s no doubt these investors are different from other generations. Yet, Gen X and Gen Y alike have some commonalities. They tend to appreciate the use of technology, such as webcasts and social media. They often prefer to meet annually, not quarterly. They like hearing about progress towards goals, not the S&P 500 or DJIA. On the other hand, leading stage boomers have different expectations. To them, technology is a tool to help create greater organization in their life. This group often wants to meet more frequently and in-person. For some, they may want to bring their children or grandchildren along to meetings, or other professionals, like estate planning specialists or Medicare and long-term care experts.
At the end of the day, client service and investment advice cannot be viewed as a one-size-fits-all proposition. Each strategy or solution must be tailored to the unique needs of every individual and at every stage of the client wealth cycle.