One of the toughest obstacles for advisors is telling clients what they need to hear instead of what they want to hear. Some people simply don't want candor. Some people refuse to be coached.
However, if you make a resolution that anyone who walks in your door is going to hear the truth, you will ultimately find yourself with a more stable client base. You will be in control of your practice and, besides that, avoid some needless stress. At least that's how it's worked out for me.
There are some significant barriers to embracing this philosophy. One reason investors resist reality medicine is that they have adopted a short-term performance orientation from the mass media. Sex sells, and sexy investments sell. Investors want to hear about hot stocks, not cold facts.
Unfortunately, the financial services industry hasn't done much to shake the delusion that TV talking heads can predict the future. The exhilaration of beating the markets has relegated the topic of comprehensive planning to an afterthought for most of the investing public.
There's occasional lip service paid to planning, but since most advisors make more income managing money than creating financial plans, it's no surprise that most advisor/client discussions veer toward investment returns. "How much can I make this year?" is what the public wants to know. No one asks, "How much can I lose if I do this?" They want to hear about an investment that might double in value. They don't ask whether the family home will have to be sold to pay estate taxes should they die prematurely. They want to know where to find the pot of gold but no one asks for a road map.
The investing public has been deceived into thinking there are secret passages that lead to investment return heaven. TV analysts are like the guy sweating in the hot sun at the track who says he has today's winners-if they knew which stocks were going up, why would they tell you instead of making a fortune and retiring to their compound on Long Island? Sadly, most investors never ask that question. They are preoccupied trying to find the next hot dot.
This distorted preconditioning impels many advisors to play the performance game with clients. Preliminary discussions about mundane topics like planning, documentation, goal-setting and the like are disregarded in favor of a stroll down a path paved with the yellow bricks of euphoria.
Clients do not want to hear what advisors know in their heart to be the truth: Over the long haul, planning is more important than returns. But until it becomes an unwavering policy to refuse investment management unless clients submit all necessary documentation, advisors will continue to beat their heads against the performance wall. And we all know that is a dead end because the first time that type of client suffers even a minor disappointment, he's off to the next advisor. Unless advisors insist clients provide all the mundane but critical details that are the underpinning for proper planning, they will be locked in to an endless cycle of client frustration. It's no way to have positive client relationships or to build a satisfying practice.
Don't Assure Me, Show Me
Investment strategy flows naturally from comprehensive planning. But at the end of the day, most advisors tout their portfolio performance, not their planning prowess, because that's what attracts new investors. The hope for higher returns, not superior planning and attention to detail, is why people come in the door. Quite often, investment returns are what dictate 80%-90% of advisory income. That's a huge iceberg to circumnavigate.
We've all heard investors brag about a big killing in the market. Have you ever heard anyone brag about her great financial plan?
Ask a prospect whether her beneficiaries are in order and see what kind of reaction you get. At worst, a blank stare. At best, reassurance that her paperwork is all in order before she asks, "Now can we talk about what stocks or funds you think I should buy?" While it may seem easier to take a client's word that her documentation is complete, accurate and up to date, relying on her assurances is dangerous. Clients may believe everything is fine because they thought about making that change to their will for so long that they came to believe they actually did it. They may regard digging up their paperwork as a needless hassle, or be too embarrassed to tell us they don't actually know where their paperwork is. (Of course, should they die, their relatives will have absolutely no trouble locating it.) I believe, in most cases, clients simply don't understand the importance of letting advisors review their documentation.
Have you ever prevailed upon someone to let you review their trust-the one they said had been drawn up a couple years back-only to discover it was ten years ago and the trustee is a daughter who hasn't communicated with the client for the past five years because of a family argument?
Have you ever had a client become incapacitated, only to discover that the long-term-care policy he purchased before you became his advisor does not provide him with benefits until day 366?