Can We Talk? Do You and Your Adviser?

You should hear what financial planners and other investment advisers say behind their clients' backs.

You should hear because it could only help both parties--client and adviser--better understand each other as the field of personal financial management booms.

Last week, more than 1,000 investment advisers converged here for an annual conference sponsored by discount brokerage Charles Schwab & Co. The two-day meeting gave advisers a chance to discuss the hot topics in their business, which is mushrooming as more Americans hire independent (i.e., non-broker) investment experts to manage their money.

Interestingly, no topic seemed hotter this year than client communications: how advisers get clients to understand how the adviser picks investments, whether individual securities or mutual funds; how risk is explained, and what the client should expect in short- and long-term performance.

Against the backdrop of a stock bull run that seems to know no limits, many investment advisers at the Schwab meeting worried aloud that their clients--generally people with portfolios of $100,000 and up--are too sanguine, and are less prepared than ever for what could be increasingly volatile stock and bond markets.


What makes for a great relationship between adviser and client, a relationship that can endure whatever tough markets lie ahead? Here are some of the major points that emerged from the conference, as the advisers themselves might relate them:

* I admit that managing money is mostly art, not science. Philip L. Wilson, head of Wilson Associates International and the developer of numerous well-known portfolio-analysis and management formulas, said investment advisers must be realistic with themselves and clients about what they really do: "We read a lot and guess."

Clients, Wilson said, must not be allowed to assume that an adviser has some black box that will ensure a specific performance outcome when certain assets or individual securities are mixed together.

"You never want to say to a client, 'We're going to give a 10% return,' " Wilson said. "What you should say is that we're expecting to give you a return in a [range], and there's X-percentage probability of that happening."

The key is that the client must be told why the adviser uses a particular asset-allocation model, the assumptions made about markets, inflation, etc., and the probable outcome, Wilson said. In other words, managing money may be an art form, but the artist--the adviser--must still demonstrate a technical proficiency.

That was echoed by Kathleen Gurney, founder of Financial Psychology Corp., who warned advisers that "most of the litigation [against investment professionals] today is over process versus performance," meaning that clients often sue on the grounds that they simply didn't understand the adviser's methodology.

* I'm in sync with my client on issue of risk. Few topics prompted as much discussion--and worry among advisers--as whether their clients understand the true level of risk they're assuming with any particular securities portfolio.

Many advisers admitted they must do a better job of laying out the risk-versus-return equation: The higher the return the client wants, the greater the level of risk involved. Not just the risk of loss of assets, but the risk of greater volatility in asset values than the client can reasonably stand.

As Harold Evensky, a partner at the financial planning firm of Evensky, Brown & Katz noted, the adviser's goal isn't to make the most money possible for a client, but to correctly position the client on the so-called Efficient Frontier of risk versus return, visualized as a graph with return on the vertical axis and risk on the horizontal axis.

"If you don't know how to explain that graph to your client, you shouldn't be charging fees" to manage their money, he said.


But some advisers noted that a perennial problem is accurately judging clients' mentality toward risk. Given written surveys, for example, most people "either over- or underestimate their risk tolerance," said Kathleen S. Wright, senior consultant with Yanni-Bilkey Asset Planning.

Psychologist Gurney tries a direct approach: "I always ask them if they can emotionally afford what they want to do" with their money.

* Theories about money management are fine, but I always remember that my clients are human beings. One of the popular new theories on Wall Street is that investors only need common stocks and a long-term outlook. Forget bonds and other assets, because stocks do best over the long haul.

Most advisers believe that theory to be true on paper, but dangerously misguided in practice. Most clients, advisers say, could not possibly handle the volatility that an all-stocks portfolio can suffer in the short run.

Likewise, another popular theory says that lump-sum retirement-account dollars ought to be dumped into the stock market all at once, rather than "dollar-cost-averaged" into the market via small purchases over time.


But that assumes that the comfort many investors take from a gradualist approach is worth nothing to them. As Evensky put it, "The academics say dollar-cost-averaging doesn't make sense. But for human beings it does."

Wayne Woodman, vice president of Tower Asset Management, pointed out that advisers must recognize that certain events--such as the 1991 Persian Gulf War--can cause even the most rational clients to suffer "goal displacement": They forget, in the emotion of the moment, their long-term financial goals, and the logical route to those goals. One of the adviser's primary jobs is to stop goal-displacement, he said.

* I am constantly looking for better ways to keep my clients informed of what I'm doing. Some advisers noted that there is no way to insult clients by communicating more with them, rather than less.

Communication, through newsletters, in face-to-face meetings or in other forms, is all part of the critical task of managing clients' expectations, advisers agreed.

Larry Waschka, a former stock broker who said he started his own financial planning practice because he wanted to manage wealth rather than sell securities, now includes short audiotapes when he sends quarterly performance updates to clients. They love the tapes, he said, because they can listen in their cars (or wherever it's convenient) to his review of portfolio performance and his outlook for markets.

In addition, Waschka said, "If we get two or more questions [from clients] about something, we send out a memo" to all clients, because he assumes that the issue is on the minds of many investors.

Some experts noted that with the huge amount of financial information available in the media and over the Internet, advisers run the risk of having their stature shrink in the clients' eyes unless they actively communicate their strategies and views, and keep the client focused on a proper game plan.

* Finally, I only take on clients who are right for me, and vice-versa. Investment advisers' styles differ. So do clients' needs and risk parameters. An adviser who takes on investors who don't really fit his or her style risks spending too much time working with those clients, to the detriment of other clients.

Waschka suggested that most advisers avoid the "do-it-yourself" investors who still show a strong desire to manage their own money, even after they hand it over to an adviser. "Beware the do-it-yourselfers, because you're going to take their hobby away," he said.

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