How to Get Clients to Stick to the Script

We live in a society built on instant gratification. We change stations when the car radio goes to a commercial. We opt for commercial free internet radio. We read articles promising weight loss without diet and exercise. Why should your client’s approach to the stock market be any different?

Years ago, when I was in production, another advisor told me an anonymous story about a client of his, a Russian émigré. The guy came to the US at a time Russia was facing rampant inflation. Back in 1993, inflation over there was 840%! (1) Based on this logic, he assumed the US stock market rose every day, the only question was by how much! Clients often have little patience.

You’ve seen the Dalbar studies. For the twenty year period ending in 2015, the average growth fund investor earned about 5.19% annually while the S&P 500 averaged 9.85%. (2) Its that buy high, sell low thing.

Keeping Clients Invested

People seem to want everything. Not only do they want the market to go up, they get fidgety when it goes sideways. They have completed a financial plan . The asset allocation categories are filled with money managers or ETFs. They want to get out. “Let’s do something else…” Several charts are referenced in these examples. They come from a Morningstar Report, “2018 Fundamentals for Investors.” (3)

1. Mountain chart. You’ve seen the Ibbotson chart (3) showing how equities have outperformed other asset classes over time. But it doesn’t go up in a straight line. Patience is a virtue. Point out the shocks and scares the market has endured over time. There’s a chart for that too. 2. Tapestry chart. Before the dot com bubble burst, people chased the hot dot. Your client has heard about a hot dot. Maybe they see articles about how well a stock/fund/sector did last year. Show them how leadership changes, often year by year. (3) That chart, showing return by asset class is sometimes called the tapestry chart, because it looks like a quilt – lots of little boxes of contrasting colors. It’s easy to pile into last year’s winner, but leadership rotation may have already started. You make the case for diversification. 3. Family Index. Try to get them away from thinking beating the indexes is the objective. Why? Because the DJIA and S&P 500 are 100% equities. They likely own a balanced portfolio. Determine the rate of return they need to reach their long term goals. Factor in contributions they have agreed to make along the way. These calculations should yield a number representing their personal, or family index. That’s the number they need to hit. I thank a New England advisor for coming up with the concept. The drawback is you don’t want a negative year. The advantages are the expected percentage gain may be a modest number. You recalculate every year or so. 4. Timing the market. People don’t believe it can’t be done. There’s a chart for that too. (3) If you stayed invested between 1997-2017, you averaged a 7.2% return. If you only missed the 10 best days, your return drops to 3.5%. Miss the 50 best days and your return is a negative 4.5% 5. Talk real estate. For many Americans, their single largest investment is their home. Real estate prices rise and fall. Will the fidgety client consider selling their home because interest rates and taxes are rising, yet SALT deductibility is capped at $ 10,000? Of course not! It’s a great neighborhood. Real estate has always been good to me! They are in it for the long term. They might even quote Will Rogers: “Don’t wait to buy real estate. Buy real estate and wait.” (4) Please apply the same logic to your investment portfolio. 6. Silver collectors. They (or some of their friends) may be antique collectors. According to Nielsen data, about 8 million people watch Antiques Roadshoweach week. (5) Popularity of different categories of antiques often run in cycles. People who collect sterling silver know there’s an underlying value to the precious metal. If clients own solid companies with stable, often increasing dividends, they have a different kind of underlying value. Total return stocks pay you to wait. 7. Asset allocation. If your fidgety client wants to do something, you can always look at rebalancing. Ideally this is done by adding some fresh money. They might go into sectors your client favors. You are being responsive, yet keeping them on course. 8. Life is not a pop quiz. Ideally, you have scheduled portfolio reviews on the calendar. They call, complain the market is flat and they want to try something else instead. You will certainly follow instructions, yet you can make the case it’s important to look at the big picture. “Our next comprehensive portfolio review is scheduled for three weeks from now. We can move it up if you feel it’s necessary. Shouldn’t we study the big picture?” 9. What have you heard? It’s worthwhile to draw them out. Learn their motivations. They might have been solicited by a competitor. They heard something on TV or a cable financial news channel that scared them. This gives you the opportunity to put things into perspective. 10. Collectible lunch boxes. They are not an alternative asset class. Every so often people hear about buying gold coins on late night TV. They read about how people are paying big money for Star Wars toys in the original boxes. They think this is a better way to save for their retirement than investing in equities and fixed income. Draw them out. Remember the risk pyramid. They can buy and own fun stuff, but only with a small portion of their assets. 11. Tax consequences. Your client has done well. They bought and held. Now they are getting fidgety. They own ETFs. They want to sell and do something else. Remind them they will be paying taxes on their gains, unless they have offsetting losses or this is done in a tax deferred account. They should consider all the facts. 12. Horse racing. You have a good mutual fund or other form of money manager. They’ve made money. They want to do something else. “If you had a racehorse and it was winning races, would you shoot it?” They can take some money off the table, but conventional investing wisdom says to let your profits run.Related: The Rich Are Cheap and Why This Works in Your Favor

You will follow instructions given by your client. However, you can make the case for following your advice and sticking to the plan and your recommendations. Ultimately, it’s their choice.