Engaging your clients more effectively

By Christopher Hope | January 1, 2011 | Last updated on January 1, 2011
8 min read

When investing, leave emotion at the door.

In uncertain times, as markets look for turning points that shift from negative or flat performance to more positive returns, this long-held cornerstone belief is one of the toughest for investors to live by. After all, investing is a very human pursuit and is often influenced by personal perspectives. Especially in turbulent, uncertain times, it’s subject to deeply human reactions.

For advisors, times like these present real challenges, as investors seek reassurance their portfolios are not only weathering the storm but are also well positioned to take advantage of any future attractive opportunities.

Providing such reassurance isn’t always easy when the morning headlines are filled with catastrophism based entirely in the moment. Expectations can swing wildly during times such as these, when everyone’s looking for signs of a shift from negative to positive.

So how do successful advisors handle shifting expectations? Are they in fact seeing a marked increase in client expectations, fuelled by nothing more than sheer hopium, as some call the all-too-human desire to hope for more positive results? Are advisors’ phones ringing and BlackBerrys chirping with investors desperate to find out which way to turn and what to think of current conditions?

The answers may surprise you.

Know your client

For financial advisors, understanding and successfully managing the expectations of their clients is beyond vital; it’s the difference between success and failure.

But a firm grasp of human nature isn’t the sort of skill that can be absorbed from a textbook or picked up in an evening class. It’s an innate ability developed entirely from the need to hold true to sound, basic investing principles.

If advisors have a strong understanding of human nature, they’ll succeed and prosper. If they don’t, they may yet find success in their chosen field, but it likely won’t involve dealing directly with the investing public. What’s clear is they must have that sense of how an investor views his or her portfolio’s structure, and how best to communicate its performance in light of these expectations.

Ultimately, managing psychological expectations is achieved by holding fast to well-proven principles, a theme experienced advisors come back to time and again. For Nancy Woods, associate portfolio manager and investment advisor with RBC Dominion Securities, effectively communicating proven investing principles is an ongoing requirement, one that should start at the very first meeting between advisor and client.

“As an advisor, you have to really know and understand who you’re dealing with, starting by just listening to them,” she says. “You also have to really know and understand what you hold and manage on their behalf.

“In very simple terms, being an advisor is a never-ending test of psychology. Thinking long-term is always best, and an advisor should tell his or her clients that trying to time the markets is risky and counterproductive.”

But this can be challenging during difficult times.

“In tough times, clients want to know how to protect themselves,” notes Woods, “and this depends upon their own unique profiles. What are their goals? Is there a specific income they expect to derive from their portfolio? Good times or bad, it’s hard to argue against stocks that have a good track record for dividends. Dividends are great because you want to be paid while you wait for broad-based conditions to improve.

“Having a solid and well-diversified financial plan is essential to managing client expectations, regardless of the current environment. It remains a constant long-term goal. Explaining this to them in clear detail is the best way to manage expectations.”

Investments don’t make mistakes. People do.

Patrick Nicol of Dundee Wealth Management in Ottawa agrees, pointing out advisors who stick to strong principles will always be successful in managing expectations. The need to show that each individual investor’s financial plan is based on these principles from day one is extremely important. He also stresses current conditions are nothing new—something a review of history easily supports. “As a noted behavioural investment counsellor so accurately put it, ‘Investments don’t make mistakes. People do,’ ” he says.

As he’s quick to point out, investors now face a sea of often conflicting media sources and opinions that can test the discipline of even the most calm, cool and collected.

“When everyone is piling in, it’s usually too late,” he says. “When clients call regarding something they’ve read or heard, an advisor needs to tell them it’s okay to read it and to talk about it, but they should never act on it. Forget all the noise and point out the futility of following trends that undermine the three key principles that have made their portfolio successful. As investors, they’re going to have down years, but in reality, they should welcome them because opportunity usually follows.”

While it seems like only common sense to conclude that uncertain times will result in highly reactive clients, this isn’t necessarily the case. Jonathan Rivard, an advisor with Edward Jones in Toronto, feels the opposite is often true.

“Right now, I find clients’ expectations are actually very realistic,” he says. “Bad news has a way of lowering expectations and making an investor’s outlook much more cautious due to the amount of unknowns.”

So while the news can influence their outlook, it also makes clients that much happier when their investments perform well in a tough market.

“A bombardment of relatively poor news such as we’re seeing now,” Rivard continues, “suppresses expectations, which gives advisors an opportunity to really demonstrate their value through the strength of their long-term plan. Educating clients on the safety of their investments, the steps you’ve taken to preserve their capital and how they’re still on course towards their long-term goals according to a transparent and well-documented financial plan is never more important than now.”

Rebalancing act

All agree emotion can be a very dangerous thing, undoing years of careful research, planning and discipline. Changing course based on perceived bad news or unfounded faith in overly optimistic sentiment is never wise, and threatens to destroy proven risk management strategies overnight.

Again, education and transparency go a very long way towards managing client expectations that may be driven purely by an abundance of either positive or negative data, which often has no real correlation with an investor’s established financial plan.

To this end, Nicol has developed a long-term strategy to effectively pre-empt the kind of apprehension clients may feel in the face of markets looking to find a positive footing.

“Once a year, we rebalance each client’s portfolio according to the long-term plan set up for them. It’s not sexy or exciting, but what it’ll do is have the client’s portfolio outperform each fund on its own and as a whole continuously, by reinforcing the buy-low, sell-high discipline. We must be certain we’re not under-diversified, but it’s equally important to not be over-diversified either. I like to think of this as idea diversification.”

Nicol’s suggestion to other advisors: “A year after you’ve set up a portfolio, revisit it to ensure you’re still in the same weighting you intended in order to reach your client’s financial goals. This should be done each year at the same time. This practice will automatically force you to take your winners and feed your losers, which will in turn increase your long-term, real-life returns and make them better than even those of the investments themselves.”

Advisors are the first to understand cycles of change. While markets can shift in an instant—and often do—a long-term outlook reveals these cycles are not only logical but are also in many ways predictable, based on underlying market fundamentals.

Demonstrating this understanding is essential in helping manage client expectations, and experienced advisors are quick to point out the virtual certainty of markets to recover.

Although it’s difficult to provide clients with specific predictions as to when a turning point will occur, the long-term ability of markets to recover is beyond question. Again, most advisors agree a well-balanced and logically considered financial plan is the best defence against client uncertainty.

And the ability to understand the human side of an investor’s expectations and bring it in line with a strategy that works best to achieve their long-term goals is extremely important.

“Each advisor has to demonstrate their value to the client, and that has to be ongoing, regardless of prevailing conditions,” says Rivard. “It’s sometimes a difficult conversation to have, but you have to be very realistic, always maintain a cautious outlook and stress there are always unknowns. But for those who are well structured for the long term, a clear discussion of the facts provides the best reassurance.”

Advisors should also warn clients against following the crowd. “Always talk the client out of following so-called trends, which can play havoc with an investor’s discipline,” says Nicol. “I’m always the first to tell them I don’t know where the markets are going right now, and frankly I don’t care—which sometimes catches them off guard. But boring is good in my eyes, because when you can show your client that boring has always paid off, it’s pretty hard to argue. That’s always reassuring.”

Rivard concurs. “Today’s media stories are always short-term, while a successful financial plan is always long-term. The media can make an investor feel they’re under-performing, when in fact, their financial plan is achieving exactly as planned, based on their individual goals. The long term always comes back to positive growth, but patience and discipline are essential.”

Searching for a comfort zone

Nothing succeeds better than a well-considered plan that supports an investor’s goals and establishes a position open to opportunity. But such a position also needs to be resilient to shifting market conditions. Diversification frees both advisor and investor from the stress and anxiety that can result from having to continually monitor shifting market conditions.

A review of market history across all sectors of investment proves that slow and steady is also a logical and well-established strategy. It’s a comforting concept for investors, and goes a long way to curbing any unrealistic expectations.

In essence, experience proves that the best way to manage expectations is to set the time horizon for each client as far as possible right from the beginning, and continually illustrate the strength of this approach through clear and transparent use of supporting data. With a careful, thoughtful interview, any unrealistic client expectations will reveal themselves early on.

Rapidly changing conditions, sometimes unexplainable market shifts and the minute-by-minute financial reporting that now bombards investors can wear away at the discipline, patience and faith so carefully constructed by advisors.

So while a return to a bull market is an eventual certainty, the task of managing client expectations as they prepare to change direction is far from easy. But then again, it never is—so begin the process early and keep it going.

Christopher Hope