When clients get too fixated on outdoing the market, it may be useful to ask some guiding questions
Given rising pressures to build retirement nest eggs and shifting trends in pension plans, it’s understandable for clients to demand investment performance. But when they adopt unrealistic expectations and start expecting consistent market-beating returns, they could take on too much risk or fail to reap the benefits of long-term investments.
When clients become obsessed with beating a certain index, it may be useful to ground them a little with some targeted questions. “I first ask ‘Why do you need to beat the market? Why is that your goal?’“ Scott Bishop, executive vice president of financial planning at Houston-based STA Wealth Management, told the Wall Street Journal.
After that, he clarifies by establishing how important money is to clients, and why it’s important. He also poses a hypothetical scenario: “If the market lost 30% and your portfolio lost just 28%, you’d still be ‘beating the market,’ but would you OK with that type of loss?”
By introducing a scenario where aggressive investing fails to pay off, he said, he can nudge clients into a discussion of appropriate risk, asset allocation, and the benefits of long-term strategies they’ve already committed to.
From there, clients can be refocused toward their financial plan, where they can be reminded of the more returns and investment goals that support their own personal objectives.
“Clients today are influenced, both positively and negatively, by an abundance of market data, advice and information—but information is cheap,” Bishop said. “Expert consultation on a long-term strategy—and the encouragement to stick to it—is what they should be paying you for.”
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The challenge of pushing clients toward risk
How investors can avoid market “euphoria vortex”
When clients become obsessed with beating a certain index, it may be useful to ground them a little with some targeted questions. “I first ask ‘Why do you need to beat the market? Why is that your goal?’“ Scott Bishop, executive vice president of financial planning at Houston-based STA Wealth Management, told the Wall Street Journal.
After that, he clarifies by establishing how important money is to clients, and why it’s important. He also poses a hypothetical scenario: “If the market lost 30% and your portfolio lost just 28%, you’d still be ‘beating the market,’ but would you OK with that type of loss?”
By introducing a scenario where aggressive investing fails to pay off, he said, he can nudge clients into a discussion of appropriate risk, asset allocation, and the benefits of long-term strategies they’ve already committed to.
From there, clients can be refocused toward their financial plan, where they can be reminded of the more returns and investment goals that support their own personal objectives.
“Clients today are influenced, both positively and negatively, by an abundance of market data, advice and information—but information is cheap,” Bishop said. “Expert consultation on a long-term strategy—and the encouragement to stick to it—is what they should be paying you for.”
Related stories:
The challenge of pushing clients toward risk
How investors can avoid market “euphoria vortex”
