Understanding Your True Role as a Financial Advisor
Clients and advisors can benefit from a relationship that transcends the obsession with financial returns.
How does this work? After all, no financial advisor has ever been dumped for excellent performance, right?
Understanding the Client/Advisor Relationship
Let us start by defining what we know and don’t know.
Banks, asset managers, private banks, and any other institution handling your assets do not have a magic ball to see into the future. No amount of machine learning, econometrics, fundamental or technical analysis can guarantee you that:
> North Korea won’t decide to fly some nukes over Tokyo
or that
> Well, Covid-19…
Corporate reports are the same — who knew that back in 2019, Tesla would report such a substantial profit and overshoot almost 100 dollars in just three days? Kickstarting the mother of all rallies? This is also what risk is.
And assessing and predicting risk is the reason for so much discontent:
clients -> advisors: “Hey! What can you tell me about Tesla’s upcoming report?”
advisors -> organization: “How come we didn’t expect Tesla’s numbers?”
What we do know is how historically, financial assets interact. We know that stocks will act like stocks from a risk/return perspective. And that World crises and unforeseen events can invariably affect a stock price. These jumps and falls can be quite unpredictable.
As an Advisor, How Can You Prevent Unnecessary Client Upset?
Investors get rewarded for assuming the financial risk — not even gravitational laws are more robust than this basic financial premise. Returns above the risk-free rate (US treasuries) happen only if exposed to additional risk.
What can you do to ensure that your client’s fund grows without betting the whole horse?
Wealth accumulation occurs by being aware of the risks and choosing them intentionally rather than by accident. Consider the strategy below when understanding your place in the client/advisor relationship.
Strategy Over Frivolity
Returns, 95% of the time, arise from the client’s long-term Asset Allocation. In a well-diversified portfolio, the combination of macro investments should matter more than the latest Snapchat filter or Tesla’s numbers because the effect gets diluted in the US Stock Market.
For example, a simple global portfolio looks like this:
Does it work? Absolutely. A portfolio like this would have delivered an impressive 17.62% compounded annual growth rate (2009-2019). $10,000 initial investment with monthly contributions of $200 would have yielded an end of the period balance of $58,000 — not bad.
Will it continue like this? Who knows! Any other answer is a trap of trying to predict the unpredictable. Don’t sell what you don’t own or can’t see.
Top private banks know this and follow a simple investment principle, known as “Strategic Asset Allocation.” This selection of asset classes will largely be responsible for the overall performance of your client. Small deviations from these targets can and will occur but are they immaterial.
In this context, it should be evident that financial advisors are not responsible for their clients’ performance — the market is!
Become: The Risk Tour Guide
So, what do you do?
It is all about guiding the journey, offering transparency, and earning trust.
Yes, there’s some merit in choosing these asset classes, but most portfolios out there are already well-diversified anyway. What matters is that you act as a risk tour guide. A good advisor knows what risk is and where to find it.
As an Advisor, you must be an investor yourself. Don’t attempt to see the future and test your intuition for the sake of your client. This is skin in the game or eating your soup. You should help your client navigate the complexities and reduce them to simple terms with no extra BS.
Most tour guides, real tour guides, spend an entire life discovering and living in a city. This is so that they can act as an offline Google Maps. Does your client want to see Amsterdam’s Red District or the Van Goghs? You need to know them all intimately. Know the investment industry and its hidden gems.
Financial advising is the same job!
Become: The Investment Police
One last job. Top financial advisors should act like cops, too.
Just as you shouldn’t push your client into unnecessary and unwanted risks, the contrary also applies.
If you just missed the 25 most important days in the stock market since 1990, you might as well have been in five-year treasury notes. -Michael Batnick
Strategy implementation is no minor consideration, and this is where your soft skills shine! You must make sure that your clients stay invested in the long run. Otherwise, in 10 years, that sort of inactivity will bite your performance.
Advise your high-risk clients that over-trading may be to their detriment, and you might save your client/advisor relationship from dwindling as fast as their portfolio.
You can do it. Be the friend, the guide, and the enforcer. Better advisory relationships start when we deliver value on what we can control. Nurture your client relationship with a lot of communication and a little strategy, and you will be a happier duo for it.
Happy investing!
