How to Be a Good Client?
DISCLAIMER: This is taken from the book “A wealth of common sense : why simplicity trumps complexity in any investment plan” by Ben Carlson. I did not have any input on this book nor have anything to gain by sharing it. This is for informational and educational purposes only.
This book tackles the basics about investing, although it doesn’t show you the step-by-step process how to open an investment account and what to invest in, but it discusses the important basic parts of it. For most of the time, what we need is just simplicity in our investment process.
This book is great for beginning investors, and also a good reminder for experienced investors.
What stood out for me in this book is in Chapter 9 “Financial Professionals – What a Financial Advisor can do? and also on How to be a Good Client” I’ll share to you the whole portion of it down below.
Investors want safety from losses during sell-offs, but all of the gains when the markets rise. They want to be tactical when the markets are volatile, but practice strict buy and hold during bull markets. Bonds are terrible investments during a stock bull market, but everyone clamours for them during a sell-off or recession. They want certainty and the ability to predict the future by switching to the best investments and asset classes before they take off, but to sidestep the poor performers before they begin to breakdown. Everyone wants to outperform the market over every single time frame, both short term and long term. There’s a name for this strategy—it’s called impossible.
Although the job of educator falls on the financial advisor, you still have an important role to play as a client. Appointing an advisor doesn’t mean you can stop thinking about your finances all together. It just changes those areas that you really need to think strongly about. You can’t outsource understanding and paying attention. Clients still have to know what’s going on in their portfolio and with the markets. No one cares more about your money and what it represents than you. You are the biggest expert on your own situation and needs. That means speaking up and asking questions when you don’t understand something or when you have concerns. You still have to stay involved in the process. Maybe the car is on cruise control but you’re still steering it in the right direction.
You don’t want to quibble over trivial details. It doesn’t matter all that much if an advisor decides to put 12 percent of your portfolio into small-cap stocks instead of 15 percent. But your financial advisor should have a reasonable explanation for how your portfolio is constructed. Every asset class, fund, or security needs to have a thoughtful explanation attached as to why it deserves inclusion in your portfolio. Everything should be in there for a reason.
Advisors really need to help you get the big picture stuff right, which is why you need to know exactly what types of service you’re getting—investment management, tax planning, estate management, and so on. You have to set expectations up front. What do you expect to get from this partnership and what does the advisor hope to get out of it? What are your biggest concerns and how will the advisor handle them? How will their process translate into your personal situation? How long will it take to get a portfolio up and running? Who are the third-party providers they work with (performance reports, bank custodians, tax prep, lawyers, etc.)? What’s the rationale behind their investment approach? What’s the portfolio rebalancing policy? What’s the ongoing asset allocation plan? What determines buy and sell decisions? Basically, you have to be aware of what their investment guidelines are and how they’ll apply to your portfolio. Gathering all of this information up front not only makes for an informed financial consumer, but it helps determine if an advisor is doing their job in the future.
Some other considerations when asking questions of a potential advisor: What are your biggest concerns? What are your experiences with the markets or financial advice in general? How can you turn my situation into a portfolio that will keep me on track? What are the total, all-inclusive fees for an average portfolio (including fund expense ratios and assets under management fees)? What securities or fund types do you use to build portfolios? What’s the rationale behind the investment approach? What’s your length of time working in the industry? What are your educational background and accreditations? Could you provide a current client as a reference?
Also, ask how they invest their personal money. It won’t be exactly the same as clients because they, too, have their own personal circumstances, but the general message and approach should apply. Any advisor should have enough confidence in their own philosophy to utilize it themselves and eat their own cooking.
Your personal investment policy statement (IPS) should be in writing and clearly outline all of these issues. The written IPS gives you something to talk about at future meetings. It holds both parties accountable for their actions. The advisor should use the IPS to remind you of your plan of attack when short-term temptations creep in and you should use it to hold them accountable for what they said they were setting out to do.
A great mentor will not succeed without a client who is willing to learn and take actions. It always takes two to tango.
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