The equity markets went haywire last year between December 14 and December 24. On Christmas Eve alone, the market dropped nearly 1,000 points, and we heard from one group of advisors who were having their holiday plans completely ruined because their clients were calling them and freaking out.
The cause of the pain? That group of advisors lives by an “advice-first” philosophy, an outdated model that thrives (and hopes to survive) on an emotional rollercoaster that often has clients smiling, but other times has them living in a panic over the state of their investments.
In this traditional model, success is judged by performance. The advisor and the client keep vigilant watch over an investment’s performance as its teeters from euphoric highs to depressing lows. At Beacon, we understand the risks of building an advice-first practice, and that’s why we guide our advisors to transform their practice by switching to an education-first model.
A Bond of Trust
In our experience, we’ve seen that most advisors, whether they are advice-first or education-first, use some type of diagnostic tool when working with clients. With that tool, the advisor gathers critical information, creates a financial plan, then presents that plan to the client. However, in many cases, the client never truly understands why they are getting this particular plan. They see projected returns, and they hear about growth over a lifetime of investing, but the advisor fails to fundamentally educate them on why these decisions are being made to their portfolio.
At Beacon, we work with an advisor who has an impressive client retention rate that he credits to the importance of educating his clients. When he walks his clients through their financial plan, he’s very clear on explaining the Rule of 72 and the power of losses to them. But then he does something unique, and something we recommend all advisors do—he has his clients teach those two concepts back to him! Helping the client become the teacher works on multiple levels:
- It gives the client an understanding of how things work;
- Through that understanding, the client gains confidence in their investments; and,
- This education-first process helps grow a bond of trust between client and advisor.
The Tortoise and the Hare: A Tale of Two Portfolios
The accompanying example of the tortoise and the hare portfolios helps investors understand market volatility and how the average rate of return does not equate to the ending value of an investment. Here, both portfolios begin with $100,000. The tortoise portfolio has a 0% average return, and the hare has a 10% average return, yet the tortoise has a higher ending value. Why? Because losses are more powerful than gains! If you have a 50% gain followed by a 50% loss, you are not break even—you are down 25%!
At Beacon, we believe in the math of losses and the reality of returns, and to help clients understand these concepts, we encourage you to walk them through this chart to provide them with a visual illustration of how powerful losses can be to their portfolio. For more information on how you can teach your clients these simple concepts, contact your wholesaler today!