I received several emails commenting on last week’s column on how a financial advisor keeps clients motivated and on track. One came from Robert, a veteran advisor, who wrote about his philosophy of bringing new advice to the table and how this sends a positive message to clients.
Over the past five years, I’ve acquired a number of clients who’d been put off by passive advice from their previous advisors — as one client put it, “The guy I was working with took ‘buy and hold’ and turned it into ‘buy and ignore.’” Every time I talk to clients, whether in person or on the phone, my goal is to recommend a change to their account that will leave them better off. It’s obviously got to make sense in terms of transaction costs and tax consequences, but I find my clients appreciate that I spend my days looking for ways to improve their portfolios. And not only does this get my calls returned faster, but it buys patience and keeps clients hanging in when markets get tough, because they know that we’re not just going to sit there getting beat up without trying to do something about it.
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Not every advisor subscribes to Robert’s active approach to portfolios. Of course, holdings in mutual funds, wrap accounts and separately managed accounts are regularly tweaked, but that happens without any awareness on the client’s part.
The difficulty lies in how clients interpret “stay the course” recommendations, especially in tough markets. All too often, they view advice to stand pat as the easy way out for their advisors, representing passivity and lack of effort on their part. Unfair? Of course – but that’s how many clients react unless you demonstrate the research behind your advice. You can certainly have clients walk away feeling good about staying the course, but you have to typically work harder to get clients to buy into that than to making shifts in their portfolios.
Given this reality, here are five proactive conversations you can have with clients:
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Provide an update on portfolio holdings: For advisors using third-party managers, it’s important to remember that no news is not good news. Unless you tell clients how the portfolios they own are being repositioned, many will assume that nothing is happening. It makes sense to offer interested clients a quarterly summary of shifts in sectors and top holdings in the funds that they own.
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Take advantage of opportunities to rebalance: Recent articles in Advisor Perspectives have provided differing perspectives on the benefits of rebalancing. In this article, Craig Israelson points to evidence of the value added from annual rebalancing over long holding periods. Besides offering investment merits, rebalancing gives you another opportunity to approach clients with proactive recommendations.
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Capitalize on tax-loss harvesting: No one likes paying taxes – and it seems that the wealthier clients are, the more they hate taxes. That’s why more and more advisors are focusing on tax efficiency in their investing approach and on after-tax returns. Tax-loss harvesting is another opportunity to contact clients with recommendations that make sense for their portfolios and again remind them of your proactive approach.
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Discuss your watch list of underperformers: It’s natural when talking to clients to focus on the winners, but it’s often the losers that preoccupy clients. One advisor who employs mutual funds uses annual meetings to review the performance of each fund compared to its peer group. For underperformers, he discusses the rationale for selling or maintaining the holding – and if he recommends maintaining the position, he identifies what he’ll be looking for in the next 12 months to avoid selling. Whether or not he ends up selling, clients walk away from meetings feeling that this advisor is being proactive in dealing with losers in their portfolio.
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Swap out holdings: The final approach to modifying client portfolios relates to making ongoing recommendations to change positions. This may involve monitoring valuations of existing holdings with buy and sell targets for individual stocks or for funds invested in regions or sectors. With the decline in transaction costs, cost barriers to making these kinds of changes are less and less relevant. This notion of swapping holdings also applies to natural opportunities to make changes. For example, if a bond matures, you can recommend that clients roll over into the same issuer or identify an alternative that is similar in risk-return profile. Even though there may not be a big difference between the bond that’s matured and the new one you’re recommending, the fact that you’ve gone to the effort to research an alternative sends a positive message to clients. The same principle applies to reviewing valuations on key stocks within a sector – even if you don’t recommend a change, clients feel better knowing that you are looking for better opportunities for their portfolio.
I’ve written in the past that advisors have two roles – first, to make the right recommendations to clients, and second, to keep clients invested during market uncertainty or when their golfing buddy tells them about a great stock tip. If clients view you as continually offering proactive advice to improve their portfolios, you increase the chances that clients will hang in, leaving both them and you better off as a result.
Dan Richards conducts programs to help advisors gain and retain clients and is an award winning faculty member in the MBA program at the University of Toronto. To see more of his written commentaries, go to www.danrichards.com or here for his videos.
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