When you read all the literature designed to help you advance your practice do you ever feel that it’s junk? I do!
Not because it isn’t useful but because it focuses on areas of your business that don’t really matter. It fails the 80/20 test of purposefully focusing on those elements of your business that actually move the needle.
As a risk nerd, I often find myself down the rabbit hole reading arcane papers about issues that are on the fringes of importance. I bet that happens to you from time to time when reading about our industry. Today, I want to get back to the core and investigate what the real risk is to your clients plain and simple. I enlisted the help of Nick Murray and his book “Simple Wealth, Inevitable Wealth” which is designed for clients.
So what is the real risk to your clients?
Almost all the time the real risk is that their investments will be unable to support their needs in retirement.
As Nick Murray says “the great long term financial risk isn’t loss of principal, but erosion of purchasing power”. Obviously, this is a very well known fact for any advisor, so let’s ask the next question…
What are the primary causes of clients failing to meet their retirement needs?
In one word “behavior”. As Nick Murray says “Wealth isn’t primarily determined by investment performance, but by investor behavior”. The successful accrual of investments is primarily set by increasing income, reducing expenses and remaining invested in equities/businesses as markets go up and down.
“In the great scheme of things, fund selection just isn’t that important” nor are a raft of other things advisors worry about says Murray.
Given these facts I believe advisors should spend 80% of their client time equally on these three elements of financial success. Yet, I am under the distinct impression this is not the case today with most advisors.
Let’s break these elements down and see what you can do to focus on your clients’ real risk.
Increasing your clients’ income
The typical way advisors help clients increase income is by reducing their tax liability. Since taxes are usually people’s number one expense this is crucial and a great service that advisors provide but I think there are other missed opportunities.
How about growing the pie? Rather than a financial advisor, what about a wealth coach?
Imagine if you gave your clients tips on how to get a raise, how to change careers and increase their salary or how to start a side business? Wouldn’t that be significantly more valuable than optimizing between different S&P 500 index funds? I think so, and your client will thank you for it. I believe too little time is spent on the most important variable in someone’s financial success, his or her income.
I also believe this is a significant opportunity for you to differentiate your practice from other advisors. “We don’t just manage your money, we increase your income!”
Reducing your clients’ expenses
The three biggest expenses for the average American are taxes, housing and transportation. Occasionally I hear of advisors that give great guidance on choosing a mortgage deal but it is not the norm. Once, again imagine if you were able to offer a service or a referral to a company that could find your client a great mortgage and auto-deal and thus reduce their expenses. The savings could be used to invest, better secure their financial future (and increase your AUM).
Obviously, there is a limit to how much expenses can be cut that’s why the main focus should be income. That being said, I feel there is room for improvement in this field for the advisory community. For example how often do advisors keep their clients accountable on their monthly spending? I fear not enough.
Investing in businesses/equities
We know that historically over the long term bonds have provided minimal returns after inflation and taxes. As Neil Murray states, “people seriously underestimate the long-term risk of not owning stocks” and thus gravitate towards bonds.
This is a mistake driven by “fear”. While stocks “are much more volatile than bonds – some times horrifically so – the passage of time leaches the risk out of stocks. Moreover volatility isn’t risk and volatility passes away, while the premium returns of stocks remain.” The bottom line is, if you have clients investing for the long term they should be weighted towards equities rather than bonds. Their asset allocation is of critical importance.
As an advisor you are probably putting sufficient weight on the importance of asset allocation, however, are you doing your best to ensure a client remains invested as markets gyrate? Neil Murray states clients must be educated to “distinguish between volatility and loss”. In a “well-diversified equity portfolio – only people can create permanent losses” by selling. It’s an advisor’s job to ensure their client does not do this. This is a real risk.
Conclusion
So, to conclude there are only three real risks to your clients’ financial success. Not earning enough, spending too much and failing to invest sufficiently in equities.
To reduce the risks to your client I would recommend spending some time thinking about how you could help increase their income and reduce their expenses. The chances are, you’ve already thought long and hard on their asset allocation.
Do you think there are other real risks that need to be considered? Let me know in the comments.