During periods of high volatility and market uncertainty, there is a temptation for advisors to maintain a low profile with their clients. The prevailing wisdom may be, "If they aren't calling, let well enough alone." This perception is especially true for advisors serving high-net-worth (HNW) clients.

Investors with significant wealth are typically not as concerned about short-term losses because they have the resources to survive market drops without impairing their lifestyles or objectives. They are less prone to panic when things go south and not as likely to make impulsive, potentially disastrous decisions as less affluent investors. As such, HNWs are less apt to call their advisors when the markets tremble.  

But as an advisor to HNWs for many years, I've learned that client silence is rarely golden. Just because clients aren't calling doesn't mean you should allow interactions to slide. No matter how hard you have worked, or what portfolio adjustments you have made on their behalf, if you are not regularly in touch with clients, you won't know what they are thinking.

Early in my career, I learned the importance of consistent client communications and it became an obsession. In the current economic environment and given the fact that everyone looks at risk differently today than they did just a short time ago, I have amped up my client contacts even more.

Every advisor has experienced calls from clients who respond emotionally to market conditions, and HNWs are no exception. On the other hand, I've found many wealthy investors remain surprisingly unruffled, even in the face of the current historic downturn. It may sound strange, but there are many HNWS that need to be prompted to revisit their investment strategy because they aren't worried. This illustrates the importance of consistent client communication; without it, we have no idea what they are thinking.

What Are They Thinking?

When a client has a $10 million or $20 million investment portfolio, there's not a lot to gain by being overly aggressive or not making conservative adjustments when necessary. But as these clients are usually accustomed to being successful at whatever they do, they are comfortable embracing the same level of risk they did earlier in life, which is how they got to be wealthy in the first place. As advisor, it's often difficult to convince them reducing their exposure is necessary or even prudent.

I had a client who insisted on an 80/20 ratio of equity to fixed income assets when there was no longer any need to be that aggressive. I had to convince him that since he needed $10 million to last the rest of his life he and already had $12 million in assets, there was little to be gained by aggressively trying to get to $15 million. What was more important was to make certain he stayed above $10 million.

Another client with a $20 million portfolio recently gave a friend $500,000 in exchange for a limited partnership interest in a new restaurant. When I inquired about it, he said the money was an insignificant amount and that he felt good helping out a friend. I understood his feelings but I can't think of many riskier investments than opening a restaurant in this economy. He was altruistic and enjoyed being a benefactor, but like many who have more than they need, he was unaware of how quickly his financial "safety margin" could be eroded through seemingly inconsequential investments.

Clients will often tell you something they think has happened to their portfolio. For example, one of my clients had a small portion of his portfolio invested in commodities. One position, which represented a bit over 1% of his total portfolio, was down significantly last year. The small loss was more than offset by gains in other alternative vehicles, and overall, he was down less than half the S&P 500 last year as a result of the diversification we had built into his portfolio. Yet he could not seem to get his mind off that one commodity reversal. He agonized over it, even though it was of little consequence financially.  

My phone call gave him the chance to express his angst and also gave me the opportunity to reassure him of the overall health of his portfolio and that the loss was more than compensated for by his other holdings.

Getting him to look at the whole picture was the key, of course, but had I not been in touch, I never would have known how concerned he was over that one small facet of his asset allocation. In the current economic environment, I believe our role as advisors is to help investors avoid hyper-analysis of minor portfolio elements and instead concentrate on overall results. For my distressed client, diffusing that disproportionate anxiety and working through this issue has strengthened our relationship and helped him focus less on individual pieces of the puzzle and more on the big picture.

What Can We Do?

In our practice, we've implemented three regimens to help provide support and guidance for our clients:

Market Updates. As opposed to having updates dictated by the calendar or a pre-arranged schedule, we issue updates whenever something occurs that may have an impact on client portfolios or investment strategies.

The client response to these ongoing updates has been positive to the extent we've received numerous compliments and requests to "keep them coming." The bulletins have also promoted two-way communications with clients, who often share their thoughts or concerns about an ancillary topic, something we might never have known they were thinking about. The conversations give us the opportunity to remind clients of the strategic adjustments made over the past year and the impact of those modifications. Knowing that we are taking action in response to the changing economic environment helps gives them peace of mind.

Strategic Portfolio Adjustments. Traditional "buy & hold" tactics that once may have made sense have given way to a more proactive approach of looking for market opportunities and making appropriate portfolio adjustments.  

In conversations with other advisors, I find many are hesitant to alter their long-term, buy-and-hold asset allocations. But at a time when equity values continue to plummet while opportunities in other sectors emerge, advisors must be willing to abandon some cherished beliefs and traditional approaches in favor of a more active strategy that helps protect HNWs from falling below their safety levels.

Risk Profile Reassessment.  Throughout this crisis, we've been meeting regularly with our clients to reevaluate their financial objectives and risk parameters. In essence, we are starting over with each client, going back and asking the same questions we did when they first hired us.

If a client's plan to retire at 58 becomes unrealistic because of market conditions, we discuss what adjustments are necessary, such as living on less or working longer. It may not be a matter of making dramatic lifestyle changes. For example, a simulation may tell us that a client who owns three residences should sell one.

While postponing retirement or making lifestyle adjustments can be difficult choices for clients, if their plan is no longer on track, it's better to address the issues now. I find my HNW clients are willing to make adjustments and strategic changes in view of what has occurred in the markets. It's a new mindset but generally they are amenable to change because doing nothing involves greater uncertainty.

It's often what we don't know that can most hurt us and our clients. I believe strategic portfolio adjustments and risk profile reassessment are critical aspects of client service in the new economic climate, particularly for advisors serving HNWs. These standards must be supported by continuous client communication that promotes two-way conversations. Not only do we discover what our clients are thinking and give them the opportunity to express their concerns, but we also reinforce the foundations on which we have built our client relationships.

Timothy P. McGrath, CFP, is managing partner of Riverpoint Wealth Management, a Chicago-based consulting firm serving high net worth individuals and corporate executives. He can be reached at 312.239.1330 or [email protected].