Get clients to think about the reasons they own investments
As the father of a curious five-year-old, I frequently hear “Why?”
I know I am not alone in this, as multiple studies and surveys show that children hit their questioning peak at about around age four or five. The scene of an adult becoming exasperated by repeated “Why’s?” from a precocious youngster has become a cliché, but I do my best to avoid frustration, even when the questioning is absurd … or repetitive … or both.
As an advisor, it isn’t enough to invite questions from clients. A better approach is to design conversations around answering the unspoken “Why?”
Why is that, you ask? Because focusing on the question “Why?” is essential for true learning.
The question “Why?” is so powerful that asking it is one of the core tenets of Sig Sigma, a set of tools and techniques for process improvement. The analysis phase of Six Sigma seeks to understand the root cause of problems or defects, and a key method for identifying a root cause is known as 5 Whys.
The notion of asking “Why?” five times to truly understand what is going on sounds simple, but our willingness to ask “Why?” often declines as we get older and supposedly wiser. Too often, we avoid asking “Why?” and nod along, feigning understanding, because we are afraid that questioning will make us appear ignorant or naïve.
A way to do this in portfolio construction is by building portfolios around asset strategies, not asset classes. By doing so, we speak about investments in terms of why we own them, not simply what they are.
In this framework, a bond allocation sits within a stable income strategy, while equities sit within capital appreciation. This framework and the mutual understanding it engenders further allows us to tailor reporting by asset strategy in a way that monitors whether a strategy is being accomplished, and not a one-size fits-all template.
Hence, clients understand that stable income is not expected to outperform the S&P 500, and they focus more on whether it is generating the income we forecasted.
Focusing on the “Why?” is not only a client-facing framework. It drives our own market assumptions and portfolio construction process.
Having credible, thoughtful answers to those questions is essential to truly meeting a fiduciary standard of care. And no, answering that question with, “It’s on a recommended list,” or “We’ve owned this for years,” is not good enough.
Last night, one of the many questions I got from my son was, “Why is Yoda’s lightsaber green?” I said I didn’t know, so he went to his second favorite source on all things Star Wars-related …
“Hey Siri, why is Yoda’s lightsaber green?”
And we both ended up learning something new.
This story is part of a 30-30 series on building a better portfolio.