As financial life planners, we hold these truths to be the basis for everything we do:
All advice and recommendations should only be made after we thoroughly understand our clients' values, attitudes, money histories, goals and dreams. The financial life planning process is the basis for this understanding. Of course, that means taking the time during the discovery process to ask the right questions. We need to know how their history affects their actions today, what their core values and priorities are, what transitions they anticipate in their lifetime and what is important for them to accomplish in both the short and long run. This is time-consuming, but critical to doing the right job for clients.
There needs to be a renewal meeting each year to discover changes that may require alternative strategies. This is in addition to regular reviews. We should never be caught by surprise or ask a client why we weren't informed of a change. We don't ever want to hear, "You didn't ask."
All people who provide financial advice should act as fiduciaries, whether or not they are legally required to do so, because it is the right thing to do. I can't imagine a client choosing to do business with a financial advisor who is unwilling to commit to putting clients' interests above his own. You don't need to wait for a law to pass to adopt this strategy today.
We need to create memorable experiences for all of our clients. In a world where service is measured by how many buttons you need to push in order to get to the person you want to speak to, we can provide an experience that clients will appreciate. We are a service business, not an advice factory. While providing sound and competent advice is critical to success, that alone will not retain clients unless their experiences are positive. They need to know that we genuinely care for them. Also, as I have written before, the little things do count. Things like having a live person answer the phone, returning phone calls on a timely basis, scheduling appointments in a way that ensures clients will not wait in your reception area for long periods of time, serving refreshments the way you would at home and not in Styrofoam cups, calling frequently just to touch base, etc.
We need to practice transparency in all of our dealings with our clients. That means disclosing all potential conflicts of interest including how much we earn from our recommendations. If you earn commissions, you need to tell your clients how much they are. We believe that transparency produces client loyalty.
No prospect is more valuable than any client. This is regardless of how much money he or she may have. As a result, we always return clients' phone calls first.
Diversification is not dead. If we learned anything in 2009, we learned that a disciplined diversified strategy that rebalances portfolios based on target tolerances works and reduces the time needed for recovery. Of course, the pundits tell us that diversification is no longer viable and they point to the period from September 2009 to March 2010 to prove it. In times like this, nothing works unless one is clairvoyant. We had no way of knowing that March 9 was the low point, and we certainly didn't expect asset classes like emerging markets and REITs to rally as much as they did. But because of our disciplined approach, we bought these assets in March and our clients were rewarded for it. We are more confident than ever that asset allocation among many asset classes and opportunistic rebalancing can weather any storm.
Since we do not know how to "beat the market," we don't claim to be able to do so. We can never understand advisors who believe that their primary benefit to clients is their ability to provide superior returns. That, of course, sets their clients up for the inevitable disappointment when these advisors cannot deliver on that promise. Before we accept anyone as a client, they are told what they can expect from us and what would be unreasonable expectations.
The goal to achieve the "maximum rate of return" is neither a goal nor measurable. We are leery of potential clients who tell us this. We probe what it is they mean by this and try to stress the importance of investing to reach one's goals and not attempting to maximize returns just for the sake of getting returns. If they insist on chasing returns, we know that they are not a good fit for our firm and we graciously tell them so.
Investing is not a contest. This is related to the previous truth, but slightly different. In this case, the client or prospect wants to beat some index, such as the S&P 500, or to have "bragging rights" at a cocktail party. To illustrate the folly of such a goal, we may ask if they would be happy if they lost 20% but beat the S&P 500, which lost 22%. We try to convince them that obtaining a return that has a high probability of them reaching their goals is what is most important. Let the money managers who are paid bonuses based on their performance relative to some index obsess over that. The reality is that it has little if anything to do with the achievement of our clients' goals in life.
There is a great deal of difference between risk and market fluctuation. Risk, the way we define it, is running out of money before you run out of life. Fluctuation is what may occur during the interim. The greatest risk is allocating a portfolio in such a way that it avoids fluctuation but guarantees a return so low it assures that the client's money will not last. While a portfolio that invests a larger percentage in equities may provide more short-term volatility, it may be less risky than the "stable" portfolio.
It's OK for clients to invest most or even all of their money in fixed income. This may seem to contradict the market fluctuation comments made above, but it is different. If a client can reach all of her financial goals in life and avoid market volatility, there is nothing wrong with this strategy if it is what will make the client comfortable. After all, why do people invest in the first place? Is it to accumulate money to watch it grow, or is it to reach their financial goals? We believe it is the latter.
Clients don't fire financial planners because of market fluctuations. That is, unless their advisors have claimed to be money managers immune from normal (and abnormal) fluctuations. It's all about delivering what you promise and not promising unless you are confident you can deliver.
Most individuals who act out of greed are not greedy. Many people spend too much time listening to the so-called "experts" who, with the advice they provide through the media, encourage people to seek the highest return they could (asking, "What is the hot stock this week?") As a result, many clients want to chase returns because so many people tell them the objective of investing is to maximize returns. When these clients are educated properly, it is the experience at our firm that they will invest in portfolios that mirror their unique goals instead.