How Financial Advisors Can Communicate Market Risk to Clients
April 14, 2022
Most clients don’t possess the same depth and level of industry knowledge that you have, so they may occasionally make financial decisions you don’t agree with. Maybe they’re considering the get-rich-quick scheme of the day, thinking about making a panicked withdrawal or considering going all-in on real estate.
Your role as a financial advisor includes helping keep investors calm and on a trajectory toward their goals, even during tumultuous financial times. This often involves balancing what your client needs versus what they think they want. Here’s how you can walk that line.
1. Don't Minimize the Request
The client-advisor relationship, like any relationship, can become strained if one person feels ignored. Always hear your client out, even if you think you have a better path in mind for them. There’s a two-fold benefit to this: listening to them gives them a chance to help verbalize their feelings and desires, and when they articulate their plan out loud, they may realize their folly on their own. Sometimes talking it out with a third party is all the person really needs.
2. Ask What’s Driving Their Decision
Did they hear about the guaranteed return on investment from a friend or coworker? Are they feeling pressured to clean out a portfolio to pay for a second home they can’t quite afford? Or are they simply scared of not reaching their financial goals? Understanding your client’s motivation is essential to handling the conversation in a way that speaks to their fears or wants. In fact, asking the right questions of your clients helps you better assist them in general, regardless of whether the issue is related to market risk or not.
3. Initiate Tough Conversations
Uncomfortable conversations are a reality of the financial planning industry, but if you’ve taken the time to build rapport with your client, they’ll be open to what you have to say. Discussions about risk capacity and tolerance should be had early, and often. When clients come to you with an idea, be explicit in what this decision could mean, with real-world examples that illustrate outcomes. Sharing these experiences can show your client that you are willing to explore new ideas but that you will always recommend the course of action you believe will best serve their financial interest.
4. Establish Your Role as an Educator
Your clients trust you as an educated, trained advisor. Often that means they want you to take the lead in making decisions. But situations like this allow you to arm your client with information and resources that can help them understand the ins and outs of financial risk assessment – information that will continue to guide them through future decisions. Explain your reasoning and encourage them to ask questions. Use common language your client understands; the last thing you want is to make them feel belittled.
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