What financial concept have you had difficulty explaining to clients? How have you overcome it?

Wilson Chen

Wilson Chen

Certified financial planner, The Wyndham Group, Raymond James, Toronto

Clients often don’t understand or acknowledge their risk tolerance. Academically, they understand that higher returns generally mean taking on more risk and that markets have peaks and valleys. But emotions get in the way. Questionnaires help establish time horizons and general risk profiles, but I also get specific and personal, using their own savings numbers and real situations. For example, I’ll ask clients how they reacted to the 2008 downturn. Or I’ll ask, “What are you thinking when bitcoin grows 1,500% and your portfolio grows 9%?”

Bringing life goals into focus also helps. For example, I’ll highlight the savings and returns that will allow them to fund their lifestyle. That focus helps establish a realistic conversation about their comfort with risk.

Jennifer Black

Jennifer Black

Portfolio manager, DFS Private Wealth and Mandeville Private Client, Toronto

Business owners need help understanding individual pension plans (IPPs): how they work, the filing requirements, how they’re managed and contribution room calculations—including for past years of service.

We walk clients through the process step by step, so they understand how an IPP benefits them because of specific calculations. For example, IPPs offer consumer price indexing and bridge benefits.

Some clients approach us about setting up an IPP, but sometimes we present clients with the idea. We work directly with clients’ accountants, so we crunch the numbers to make sure an IPP makes sense. You want to ensure the client is better off with an IPP and that it warrants the pension management fees.

Jason Pereira

Jason Pereira

Senior financial consultant, Woodgate Financial and IPC Securities Corp., Toronto

To be effective, explanations should be short and jargon-free. If you can’t explain a concept in fewer than 15 minutes, you should change your approach, taking your client’s learning style into consideration.

Most clients don’t understand how to make strategic decisions using pre- and post-tax numbers. For example, when a client in a top marginal tax bracket wants to keep considerable cash in a taxable savings account, I suggest they use some of that cash to pay down their mortgage. To get the client on board, I put the decision in its tax context: the taxable account would have to earn 6% (pre-tax figure) to be equivalent to paying down a mortgage at 3% interest (paid in post-tax dollars). Plus, paying off the mortgage can be considered a guaranteed return.

by Michelle Schriver, assistant editor of Advisor Group.

Originally published in Advisor's Edge

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