As an advisor, selling the returns of a portfolio can not only trigger compliance concerns, it can create client relationships that are as turbulent as the market itself. Too often transactions take place based on a product’s performance-or its perceived or potential performance. But what happens when that product doesn’t live up to expectations?
Education is Key
By shifting away from performance and toward client education, you and your clients can feel the calm confidence that comes with understanding the strategy that is going to work. To accomplish this, it is critical to teach the Beacon investment philosophy and communicate the power of losses on real returns.
The Reality of Returns
If you could choose between a 0% cumulative return and a 20% cumulative return, which would you choose? We have asked this question to rooms full of advisors shocked to find out the answer may not be as easy as you think!
Click here to download our newest client appointment tool:
Misleading Numbers and What You Can Do About It.
The rate of return can be completely misleading. As we see in our two investment examples in the client presentation tool above, one has large volatile swings. While it’s up dramatically one year, it nosedives the next. If you present the options to the client, without educating them on the underlying factors of volatility, which one do you think they’ll take?
“Mr. & Mrs. Client, you have two investment options. Option one goes up 10 one year and goes down 10 the next. It’s a zero percent cumulative return. Option two goes up 60 the first year and drops 40 the next for a 20 percent cumulative return. Which would you like to buy?” Presented that way, with a fixation on returns, most clients are going to take that second option. In their minds, they’re up 20 percent. And they’d be wrong. [CC1]
The Math of Losses
From our accompanying chart, we see that option one wound up with $99,000 of the original $100,000 invested, while option two, the option with a 20 percent cumulative return netted only $96,000. How is that possible? It’s due to standard deviation and range. Standard deviation measures the dispersion of a set of data from its mean and sheds light on the historical volatility of that investment. The range is the difference between the low and high prices for a security or index over a specific period. The more volatile the security or index, the wider the range. Your client needs to understand that the volatility of a product can quickly offset its rate of return; after all, it does not take a 30% gain to recover from a 30% loss, it takes 43% just to get back to even!
The Bottom Line
We encourage you to walk through this new client download in your appointments, along with any number of the client education tools available to you on the Advisor Toolbox designed to help you create engaging, impactful and educational conversations about real returns. By building this foundation of education, you can manage expectations and earn a long-term client who trusts the process and philosophy going to work on their behalf. For more information on how you can educate clients on the math of losses and the reality of returns, contact your wholesaler today!