In many cases, investors are more risk averse than what they tell their advisors, says Charles Goldman, president and CEO of AssetMark, a consulting and investment resource for advisors.
A recent survey by Concord, Calif.-based AssetMark reveals 35 percent of investors say they are willing to risk a quarter of their assets to have a chance at 25 percent returns. An additional 9 percent are willing to risk half of their assets for a chance at a 50 percent return, according to the AssetMark Mass Affluent Investor Risk Barometer.
At the same time, 88 percent of investors say they are low or moderate risk takers. The survey included 501 mass-affluent investors with $250,000 to $1 million in assets, between the ages of 30 to 70, and who work with an advisor and are primary decision makers.
This presents a challenge to advisors who have to convince clients to expect a more reasonable return from a diversified portfolio, says Goldman, who previously held high-level positions with Fidelity Investments and Schwab Institutional.
He offered some suggestions for advisors who do not want their clients to anticipate results that cannot be sustained.
“Advisors should talk in terms of dollars and cents for each client, not in terms of percentages or standard deviations,” Goldman says. Clients do not take in percentages, especially coming off a great year like 2013, because expectations are now high.
“Write everything down so you are sure you, as the advisor, and the client are on the same page,” he adds. “That way you can always come back to the written statement.”
“Third, keep coming back to the investors’ goals and talk about risk tolerance and the long-term plan,” he says.
“It is a great time to be an advisor because millions of households need financial planning but advisors need to do a better job of communicating what a diversified portfolio can return,” Goldman says.