Discussing subpar performance with clients

By Keith Pangretitsch | October 31, 2014 | Last updated on October 31, 2014
4 min read

The old adage that “It’s not what you say, but how you say it” holds true when speaking to clients about returns. During market volatility, it is imperative to provide clients with perspective and context, and to focus discussions on appropriate actions they should take and mindsets they should adopt.

Here are three keys steps to discussing performance with clients.

1. Focus on the right outcome

Even if you beat a benchmark, it doesn’t necessarily mean clients are on track to reach their goals. Perhaps they haven’t saved or contributed enough to reach their goal. In other cases, they may have saved enough, but capital preservation has greater importance and a more defensive approach is appropriate.

Read: How much volatility is too much?

Most client portfolios should include several goals, and each should have its own unique time horizon, growth requirement and risk level. These desired outcomes should also account for insurance, tax planning and estate planning. Take the example of a married couple where one person is the primary income earner. Often, income splitting in the form of contributing to a spousal plan is not done until later in life when the benefits of compounding are muted. If done earlier, the tax advantage could increase an after-tax return. This can be achieved if the right outcomes and advice are applied.

In short, tell clients the present value of their assets relative to their liabilities is far more relevant than a benchmark.

2. Identify and work toward goals

Clients need to have at least as many solutions as they have goals. Otherwise, their investment strategies may not work for their desired outcomes. It’s common to treat a portfolio as a homogenous collection of money with the only goal being growth.

In actuality, each dollar should have a distinct purpose. As an example, the purpose for essential monthly spending is certainty. You need to pay the grocery and hydro bills, so the approach for that portfolio should be risk averse. A grandchild’s education, on the other hand, could be handled more aggressively: the grandparent wants to provide adequate funding, but if things don’t work out as planned, the child or her parents could help fund the goal.

Read: Goals-based investing can calm clients

Separating short-term goals from long-term goals, and prioritizing these goals appropriately, will enable clients to focus on appropriate outcomes. Then, the asset allocation should be an outcome of these goals and the client’s assets.

3. Help clients maintain perspective

Market volatility is inevitable. We also know the majority of clients react to volatility in a way that could threaten their long-term success. The reality is, market corrections of more than 10% have occurred in over 50% of the last 35 calendar years, and managing client expectations is essential. (That stat is based on Russell 3000 Index calendar-year returns from 1979 to 2013).

In severe cases, clients can become overrun by emotion and threaten to leave because of a significant decline in portfolio values (such as 2008). Building a customized framework that includes regular meetings or monthly check-ins that continually reaffirm tracking towards stated goals ensures a single quarter’s performance does not decide the outcome of a longer-term relationship and strategy.

Read: Panicked clients? Here’s help

With correlations between domestic and global markets increasing, the ability to avoid market declines is becoming more difficult. A move to cash is one solution, but as many investors have experienced, it is not without its timing challenges. A successful tool to manage short-term emotions is to move to goals-based reporting. In the heat of the moment, clients can forget the good times and the positive impact of past decisions. A goals-based approach sets expectations by showing a longer-term view of performance, creating a range of suitable outcomes and a point of reference with past events. Goals-based reporting works best for long-term clients, yet it can also prove worthwhile for getting newer clients on the right track.

I don’t know what the market will do in the next week or the coming year, but I do know that over a 20 year period, the probability of stocks outperforming bonds are 99%, according to Ibbotson Associates and BNY Mellon Analytics — excellent odds. To take advantage of those odds, advisors must help clients put a strategy in place, keep enough short-term income and cash on hand to guard against short-term market dips, and invest long-term assets in equities (provided their risk tolerances warrant doing so).

Clients are surrounded by market noise. To cut through it and protect clients from getting burned in volatile times, identify and work toward end goals and help clients maintain perspective.

Keith Pangretitsch is director, national sales at Russell Investments Canada Limited, who has a passion for helping advisors grow more efficient and profitable businesses. He is an active member of Russell’s Practice Management program which has worked with more than 1,200 advisory teams across North America and Europe.

Keith Pangretitsch