What happens when clients become impatient with building a balanced portfolio?
How should advisers handle clients who feel a diversified approach is too boring or not aggressive enough?
Adviser Eric Aanes said that he has seen that trend among some clients, especially in recent months.
That is only natural, because during a long rising market, many clients feel safer about taking risks to capture larger gains, he said.
“Clients may tend to become less risk-averse, due to their perception that markets are stable, and they can forget a bit of the downside that can come with being more aggressive,” said Aanes, president and founder of Titus Wealth Management in Larkspur, California.
The phenomenon can be troublesome for advisers, he said.
“It’s not a good place to be for us, because if somebody wants something, they want it,” Aanes said.
When clients initiate that conversation, they already have a bias about what they think they should do, he said.
The best response is to re-educate clients about their original investment plan and how it protects against downside risk, Aanes said.
That can be more difficult to do, the longer they are into the bull market because clients may forget what it is like to lose money.
So Aanes said it is his job to remind them.
“Let me show you what you might have to go through in order to capture higher returns,” he tells clients, adding: “Then we’ll talk about the downside, and I’ll take their temperature to see whether they’re really more comfortable.”
Interestingly, Aanes doesn’t usually focus on 2008, saying “that was essentially a black swan event that hopefully we won’t see again in our lifetimes.”
But he does emphasize to clients that even the S&P 500 typically has a 14% drawdown within a year.
“By and large, our clients decide they want to stay in their original model,” Aanes said.
A diversified and balanced portfolio does not mean a static one. In fact, it is just the opposite.
Clients who understand that notion may also become less impatient.
“Yes, we diversify and asset allocate, but we also trade,” said Philip Luccock, a CFP and the president and founder of Financially Speaking in Greenwood Village, Colorado.
He emphasizes his firm’s active management, combined with hedging strategies to mitigate risks and cash reserves to reduce losses, as a way of assuring clients that though their portfolios are diversified, they are also taking advantage of opportunities.
Still, clients may decide to take the riskier approach, and for many, that might be the right move. For example, the client may not need the money to live on.
The important thing is for the adviser to explain everything and make sure that the client understands it all, no matter what course they choose.
“Then we’ve done our job, we’ve educated them, and gave them the tools to make a good financial decision,” Aanes said.
“If they want to go into a riskier kind of approach, they understand what that means,” he said. “We put up the big caution light.”
This story is part of a 30-30 series on building a better portfolio.