By Katherine Vessenes, J.D., CFP, RFC
So, here’s the bad news: The investment business is a highly regulated industry. That means there are a lot of places where you can unwittingly fall into traps. The penalties can be painful and humiliating. The regulatory environment isn’t going to ease up anytime soon, either.
Now, the good news (at last!): It’s much easier than you may think to keep your clients happy. In fact, new advisors are in a particularly good position. If you start out with a few good habits, you could have a long and happy career without investors ever filing a complaint. Follow my three-step process and it will not only make your regulatory life easier and safer, it will help you close more business, too.
 |
|
When I started in this business over 20 years ago, my mentor, George Brockway, taught me the value of giving clients a reasonable expectation of returns. |
|
1. Use a range of returns. When I started in this business over 20 years ago, my mentor, George Brockway, taught me the value of giving clients a reasonable expectation of returns. His rule of thumb was to tell investors we were looking at returns that would be double the rate of inflation. When the market was doing a steady 25 percent a year, I thought he was being way too conservative. However, when the market was doing a dismal -25 percent a year, I realized George was a genius. If I had followed his rule of thumb, even during the period of irrational exuberance, I would have slept better at night.
Takeaway: If you think your client is looking at a 9 percent return, tell him he can expect an average annual rate of return between 6.5 and 9.25 percent. Give both of you some leeway. Tell him that in any 10-year period, there are likely to be four years when the returns will be about average, three when they will be below average and three when they will be above average—I call this the “four-three-three” rule. Remind your client of this conversation later when the market is up and when it is down. (And of course, document all your meetings and calls!)
2. Manage expectations in relation to plan, not in relation to performance. A common mistake I see advisors make, particularly if they are good at picking investments, is to get their clients’ eyes on performance and compare it with some standards, such as the S&P. Now this is absolute lunacy in my mind, but it must be catching because almost every advisor I know uses this technique. The reason this is slow suicide is that you have your clients expecting something you can’t control—the market’s performance. Getting your clients focused on performance ensures that more than 50 percent of the time, they are likely to be wildly disappointed with you. You should get your clients focused on something you can control—like service.
Takeaway: Use a full, comprehensive, financial plan, with a range of returns that will succeed in getting clients to their goals. That way, annual reviews focus on the plan and the returns in relation to the plan, not in relation to the market. During your annual review, the script would go like this: “Mr. Client, as you can see during the last year your portfolio has had a return of 4.5 percent—this is well within the range of 4 to 6 percent we were looking for in order for you to retire at the age of 65.” Note that there is nothing in this script about the overall market.
3. Keep clients happy. The most important lesson is saved for last. I have found clients amazingly forgiving if you just communicate with them and prepare them for the bad news. Clients hate surprises. So, one of the reasons you need to prepare them for the possibility of down years is to prevent them from being surprised.
Keep communicating with your clients, especially during down markets. Call them with this script. When you do, it is important to say it exactly as written: “You may have noticed the market has been dicey recently. I just called to see if you have any questions about your investments.”
A worse version of this script would be: “I was thinking about you and thought you might be worried about the down market—so I called to relieve your fears.” The reason the second version would be a terrible choice is some of your clients may not be worried at all or may not even know the market is down—this speech could actually start them worrying! So begin on a positive note, listen to their questions and then answer them—reminding them of our “four-three-three” rule, and that this is one of the three years of below-average returns. Also remind them of the range they need to reach their goal and that they are on track for meeting their plan.
Takeaway: During down markets, when it can be uncomfortable to call clients and tell them they have lost money, pick up the phone. This is when you need to communicate more, not less. Focus on ways to keep your clients happy because, in the end, happy, satisfied clients don’t sue you. They refer you to scores of other prospects.
Katherine Vessenes, J.D., CFP, RFC, is president of Vestment Advisors, and the author of three books, Protecting Your Practice, The Compliance and Liability Handbook and the newly released Building Your Multimillion-Dollar Practice. For more information, call 952-401-1045 or visit www.VestmentAdvisors.com.
June 2007
Bridging the Gap
Closing the Sale—With Your Client’s CPA
Referral Radar System
Young Advisors Team
|
|
