With the 2008 global financial crisis fading in the rearview mirror, investors are slowly regaining their confidence in the stock market with a halting willingness to take on more risk. However, many still find it challenging to overcome the trust deficit created by financial advisors who view them as assets to be managed rather than people with life ambitions.
To those advisors, the market indices and benchmarks mattered most. However, to the client, it was all about their financial future. All too often, advisors focused on standard deviation, Monte Carlo analysis, and risk-return lose sight of the emotional characteristics that drive investor behavior. They then become perplexed when their clients decide to break from a perfectly good investment strategy to follow the herd over a cliff near a market bottom.
Why clients abandon the strategy
Through the advancement of digital technology, today’s investors are more knowledgeable, tech-savvy, and empowered. They are also much more attuned to their need for meaningful investment advice focused on their needs, priorities, and preferences.
However, studies show that investors’ emotions are often triggered when they don’t understand their investment strategy. When they don’t understand why their money is invested the way it is, they lack the conviction to stick with it and will abandon the strategy at the first sign of trouble, which invariably leads to underperformance.
The financial advisor plays a key role in this. In addition to helping clients to create a strategy, it’s the advisor’s primary role to help them understand the strategy and then coach them through the turns in the market. The critical role of the advisor is to instill the patience, discipline, and confidence most investors lack when investing on their own.
To gain client confidence, the strategy must be entirely about them
That becomes more challenging if the strategy is based on something other than the client’s objectives. Advisors who rely on investment performance to convince their clients their strategy is sound risk losing their confidence when their portfolio underperforms. However, when they understand the strategy and how it benefits them specifically, they are able to make smarter decisions and enjoy their lives more.
Financial advisors who fail to recognize this and continue to create investment strategies based solely on abstract investment principles will continue to widen the trust deficit. Advisors who place their clients at the center of the investment strategy and build it from the inside out will not only gain the trust of their clients but also become partners in pursuing their client’s most important financial goals.
Creating a client-centric investment strategy
Client-centric financial advisors strive to maintain an utterly agnostic view of the investment strategy until a complete investment profile is developed, pinpointing your clients’ specific goals, priorities, time horizons, risk tolerance, and attitude about money. They provide their prospective clients with the opportunity to tell their life’s journey, followed by an in-depth discovery of who they are, what’s important to them, and where they want their journey to take them. For your clients, the discussion brings greater clarity to their vision for the future. For advisors, it forms the framework for creating a customized, goals-based portfolio.
Advisors who use an open architecture are better positioned to practice client-centricity, as they are not limited in the types of investments that can be used to construct a portfolio based on their client’s goals, risk tolerance, and preferences. The focus of the asset allocation strategy is defined by the client’s goals rather than by traditional asset class definitions.
When a portfolio is aligned with a client’s profile, portfolio performance becomes less about meeting arbitrary benchmarks and more about meeting their specific needs. This enables clients to stay focused on their long-term objectives rather than the short-term fluctuations of the market, which are meaningless in the long run.
Client-Centric Investing = Clarity, Confidence and Conviction
When the investment strategy is developed around your client, reflecting their values and objectives, it’s easier to guide them through the occasional storm. It’s natural for clients to experience anxiety during volatile markets. However, when they understand and have confidence in their strategy, they are less likely to question your advice when you counsel them to stay focused on their objectives while ignoring short-term market fluctuations.
When applied in its purest form, a client-centric investment strategy aligns the client and the advisor for a single purpose, so the investment strategy and all future decisions are made with clarity and conviction. Clients know the difference, and instead of hoping the advisor’s chosen investment strategy will work for them and then breaking strategy at the first sign of market weakness, they can have confidence in their strategy and comfort in knowing their advisor has their back.