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How to Talk to Clients About Asset Allocation and Truly Be Understood

Advisors take investment selection strategies for granted. But for some clients this advice can sound like a different language.

Advisors may live in a 60/40 world. But clients don’t. 

The long-standing hypothetical allocation between stocks and bonds (or some twist on that ratio) is said to bring the proper balance of portfolio risk and reward. Yet what should an advisor do when a client has her own view of risk exposure?

Well, that’s where communication skills come in. It’s crucial to explain why a certain client needs tailored levels of risk management, income streams, appreciation potential and more. 

However, before beginning to talk about that, it’s prudent to sit back and listen, according to Erika Safran, who runs NYC-based Safran Wealth Advisors.

“The client’s job is to share their feelings about risk and what their future looks like,” she says. “Our job is to take that feedback and translate that into portfolio allocations.”

Of course, clients may still express concern even after you’ve built out a portfolio. For example, many clients these days are wondering why they own bonds and bond funds when fixed-income yields are downright insulting. Safran reminds them that “we’re investing in bonds to reduce volatility.”

Scott Bishop, a financial advisor with Houston,TX-based STA Wealth Management, tries to steer client conversations away from market risk altogether. And he thinks the industry practice of risk questionnaires for clients is misguided.

“My problem with these questionnaires is that they only reflect recent market trends,” says Bishop. And he doesn’t want his clients adopting long-term investing goals based on near-term market responses. 

He knows that older clients can be especially risk-averse, so Bishop creates portfolios that are much more focused on creating income streams that retirees can live on. As long as they won’t need to dip into much of the principal of a portfolio, they “won’t have to stress out about the market having a bad year,” he adds.

Safran eschews any excess portfolio risk with her clients, especially older ones that are entering or already in retirement. 

“The key is to build a portfolio that produces enough income to live on in the context of their short-term and long-term liquidity needs,” she says. Beyond that, there’s no need to take on further risk, at least when it comes to older clients.

That’s an approach shared by Scott Sorensen, a portfolio manager at Portland, ME-based Vigilant Capital Management.

“It all starts with our investment policy statement,” he says. “That helps our clients understand what we are aiming to achieve.” A focus on a client’s needs such as annual cash flow or inflation protection can help determine the specific assets his firm will deploy in a portfolio. 

Sorensen and his team enjoy the research process for each client, what he calls “academic time.” That doesn’t mean he’ll stock a portfolio with a range of exotic yet unneeded investments. 

“Wall Street has created so many products and put them in liquid form, and all that’s done is confuse investors,” he says. “Our models are kept simple. We only want to own a core of assets that align with our objectives.”

Finding the right income-producing instruments in today’s low-rate environment can be a challenge. Sorensen steers his clients to high-grade corporates “where we can get paid with a reasonable spread.” In equities, he’s not in search of dividend-payers, per se. 

“We focus on firms that have high and growing free cash flow,” he adds. “Rising returns help provide a hedge against inflation.”

There’s an old investing maxim that younger investors embrace risk and older investors are risk-averse. But today’s younger clients, many of whom watched their parents live through the Great Recession, have a “profound distrust of stock markets,” says Michelle Buonincontri, an Arizona-based planner. 

The lack of trust in stock and bond markets leads many of Buonincontri’s clients to prefer the perceived safety of real estate investing. 

“I tell my clients that real estate isn’t quite as safe as they think,” she says, adding that “it’s important to educate my clients on how stocks, bonds and real estate in tandem can provide the right diversification.”

Bishop also encourages younger clients to focus on the long-term appreciation that risk assets can bring, and not so much on preservation of capital. 

“Sequence of returns is not an issue for them at younger ages, so as long as they are buying into the market with similar amounts, dollar-cost averaging will enable them to benefit in the long haul, as the power of compounding means time is on their side,” he says.

While many advisors adopt risk management policies that make ample sense to us, realize that many of our clients need to start from the top when it comes to thinking about risk and reward. 

David Sterman, CFP, is President of New Paltz, NY-based Huguenot Financial Planning




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